Thursday, May 21, 2009

The Treasuries train. Hop on board.

It’s like a slow train wreck. You know it’s coming; you know it’s going to be bad, but there just isn’t much that can be done about it. Except maybe keep shorting Treasuries. Over 2 trillion of new supply of US Treasuries and only one major new buyer – the Fed. When the Fed first started the “quantitative easing”, Treasuries would rally every time the Fed was in buying. But the market is starting to ignore the Fed as the realisation of how massive the size of new supply sets in. It's also driven by the fact that traditional large buyers are struggling (such as Asian nations turning their foreign reserves inward.)
"May 21 (Bloomberg) -- Treasuries dropped after the Federal Reserve’s purchase of U.S. debt due in 2013 to 2016 as traders shifted focus to next week’s three note sales. "

Unlike other buyers who use existing cash to buy Treasuries (taking cash out of the system in the process), the Fed simply creates money. We all know what that means. Might as well give the US Treasury the “printing press” so that rather than borrowing from the Fed, it can “print” money when it needs it.

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