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Tuesday, December 2, 2008

Fed has Option to Buy Treasuries on Open Market

Bloomberg provides some additional insight into the recent Treasury rally:

“Although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited,” Bernanke said in remarks to the Austin Chamber of Commerce.

One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

Treasury prices rose on Bernanke’s remarks, with yields on 10-year Treasuries tumbling 25 basis points to a record low of 2.67 percent at 2:31 p.m. in New York, according to BGCantor Market Data. The yield was the lowest since daily Fed records started in 1962 and the least since 1955 as measured on a monthly basis.

Mish summarizes it best:
The bazooka is loaded and the helicopter drop has begun. Why anyone would be shorting the long bond when Bernanke is just doing what he said he would do in his famous helicopter drop speech Deflation: Making Sure "It" Doesn't Happen Here is beyond me.