Fed's Flawed Strategy of Buying Long Dated Treasuries to Force Rates Lower

By: Mike_Shedlock

Bernanke thinks he can manipulate treasury yields by purchasing long dated treasuries. He can't. The market is simply too big. Please consider Treasurys slide after Fed purchases .

Treasury prices slipped lower Monday, with longer-term debt reversing earlier strength, after the Federal Reserve purchased $2.53 billion in Treasurys maturing between 2019 and 2026.

Investors remained wary of buying before the Treasury Department auctions $59 billion in new debt this week.

Fed purchases last week did little to keep Treasury yields down, as equity gains and data revived some optimism among investors. A dismal monthly payrolls report on Friday was better than the even grimmer report some investors had braced for.
Ten-year note yields increased 15 basis points last week, pushing back towards levels last seen before the Fed surprised markets after its last policy meeting by announcing it would purchase $300 billion in Treasurys in the following six months.

" The Fed's problem is that the market realizes that $300 billion in Treasury buybacks is just a drop in the bucket compared to $2.5 trillion in estimated net Treasury issuance this fiscal year ," said strategists at UBS Securities.

$TNX - 10-Year Treasury Daily Chart



UBS has it wrong. The Fed's problem is that it cannot force rates where it wants no matter how many treasuries it buys, short of owning them all. If the Fed is buying treasuries at an unnatural price, supply will be unlimited. For more on this line of thinking, please see Quantitative Easing Begins; "Operation Twist" Revisited .

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.