Thursday, February 12, 2009

Fed Looks Unlikely to Buy Long-Term Treasury Securties

More bad news for bond market bulls. Interest rates are headed much higher, and it doesn't look like the Fed is going to be in the market supporting the long end.

Fed Chairman Bernanke raised the idea of purchasing Treasury bonds in November and the Fed has mentioned the possibility of such purchases in its last two policy statements. However, Bernanke notably left the idea out of his testimony to the House Banking Committee Tuesday.

WSJ is speculating that Fed officials could be preoccupied by a new program aimed at jumpstarting consumer loan markets, an effort being coordinated with the Treasury Department. That program represents an enormous commitment by the Fed. The Term Asset-backed Securities Loan Facility, which will help finance asset backed securities tied to consumer loans, could result in as much as $1 trillion in new Fed loans, a huge expansion in its balance sheet.

The Fed’s balance sheet has already swelled from less than $900 billion a few months ago to $1.8 trillion. The Fed doesn't want to take anything, technically, off the table becasue they don't want to spook the markets. But, it just doesn't look like there is room on the Fed's plate for long term Treasury securities.

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