Friday, May 29, 2009

Fed Not Targeting Long Rates

The Federal Reserve has leaked to CNBC's Steve Liesman that it is not targeting interest rates on long bonds.

Liesman reports that the $1.2 trillion in mortgage assets and $200 billion in Treasury securities bought by the Fed was an attempt by the Fed to backstop the troubled credit market and was not designed to impact rates, according to his sources, which if it isn't Bernanke, is at a minimum a leak cleared through Bernanke.

Like I have said, over the next ten years, you are going to be able to make a career out of shorting interest rates. There is no way bonds stay where they are, their is too much money that needs to be raised, and although the Fed will be in the market sopping up some of it, it will be much too inflationary for them to buy enough to maintain rates at the current low levels.

If you have borrowed long term, or plan to, make sure you have the rates locked in on a non-callable fixed rate basis. Chances are that rates this low will not be around again for a long time.


  1. what's your view of TIPs as an inflation hedge?

  2. Long bond rates go up = Bernanke claims not to target long rates.

    Inflation soars = Bernanke claims not to have prioritized inflation?

    Dollar is worth 0.00000001 ounces of gold = Bernanke claims not to have prioritized the value of the dollar?

    The Great Depression II is announced = Bernanke eats his copy of "A monetary history of the United States" and goes to yell at Friedmans grave?

    In retrospect, it's always easy to say one had more pressing things to take care of than long rates. But does it work for the worlds largest economy? "Well, we were busy trying not to make the Federal Reserve look like a bunch of indecisive cowards, so we didn't prioritize not destroying the american economy" ?

  3. @No Axe: Daily leveraged ETFs are only really good for short term trading.

    @Nick Caster: The CPI has been rigged for many years. TIPS are having the fox guard the hen house.

  4. @Tsundere. Depends on the leveraged ETF, mainly the volatility and average daily gap of the market it tracks, and daily rebalancing scheme. June 09 30 Yr Bond is down ~18% peak to trough, while TBT is up ~160% for the same period. I recognize this is a bit apples to oranges comparison. Yield on the 30 is up 84%, so TBT is about double. This could all change if Treasuries become significantly more volatile, so I would not hold for investment purposes without careful daily monitoring.

  5. My math was wrong in last comment. TBT is only up ~62% from Dec 08 low, so it has underperformed the yield increase on the 30 year (which it is not meant to track directly anyway).