The Fed announced that it would further expand its balance sheet through further purchases of bonds. This should not be surprising.It is a continuation of the existing Fed policy. Buying more MBS to the tune of $750 billion is an extension of current actions. What was surprising was the inclusion of Treasury bonds. The reaction was swift. Higher stocks, lower bonds, and a dollar sell-off.
While the market was surprised overall by this announcement, it was expected to come later in the Spring, this makes sense from the longer-term policy objectives of the Fed. All longer-term Treasury yields have moved higher since December. Most corporate bonds and MBS are priced against Treasuries so even though spreads have come down as credit markets have improved, the overall yields have held firm.
The higher Treasury yields are strange given the deepening recession so a likely explanation is that Treasury supply is crowding out the market as investors continue to hold short-dated paper. Hence, the Fed has to get yields down through buying Treasuries. We already know that China and Japan will not have the same buying power, so the Fed will be the buyer of last resort and allow asset markets to reinflate.
Who get hurt in this? The dollar, but the government does not seem to care. If the dollar falls exports will get cheaper and the no one in the US cares if foreign bond holder take a hit. There is no dollar policy or at least there is no strong dollar policy. Of course, this may not be an immediate problem since we have been in a dollar rally, but the problem will follow the Treasury and Fed. The worry of inflation will resurface soon.
While the market was surprised overall by this announcement, it was expected to come later in the Spring, this makes sense from the longer-term policy objectives of the Fed. All longer-term Treasury yields have moved higher since December. Most corporate bonds and MBS are priced against Treasuries so even though spreads have come down as credit markets have improved, the overall yields have held firm.
The higher Treasury yields are strange given the deepening recession so a likely explanation is that Treasury supply is crowding out the market as investors continue to hold short-dated paper. Hence, the Fed has to get yields down through buying Treasuries. We already know that China and Japan will not have the same buying power, so the Fed will be the buyer of last resort and allow asset markets to reinflate.
Who get hurt in this? The dollar, but the government does not seem to care. If the dollar falls exports will get cheaper and the no one in the US cares if foreign bond holder take a hit. There is no dollar policy or at least there is no strong dollar policy. Of course, this may not be an immediate problem since we have been in a dollar rally, but the problem will follow the Treasury and Fed. The worry of inflation will resurface soon.
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