I read today how the fed added cash to the credit markets today, and as a result, stocks soared and Gov’t bonds fell in price. Can someone tell me why this would cause a decrease in the value of bonds and the logic behind it? Thanks.
Bond prices fell because $$ went out of the treasury market and into the stock market.
I still don’t see how this causes the price to fall. Can you explain further?
Supply and demand.
Demand for Treasuries decreases because people get excited about the stock market. Supply for Treasuries decreases because the fed is buying Treasuries (adding cash to the market). The decrease in demand must have been more significant than the decrease in supply (because the price dropped).
Good question, this particular phonomenon can be related to the concept “safe heaven”. While when the markets were declining people chose to buy US govt securities as they are considered the most credit worthy financial instruments (safe heaven). Now when the Fed has announced a new $200b credit package allowing mortgages as collateral investors are selling US govt securities (causing prices going down) as they are shifting to riskier assets as in equities ( see dowjones going up). Thanks, Krishariss
The 200B package took the form of the FED issueing US treasuries to banks in exchange for CMO’s and the such…
It is not as straightforward as some are suggesting. Why wouldn’t it work like this: 1) The Fed is buying treasuries, so it is effectively bidding their prices up, not down. 2) The Fed is buying treasuries, thus adding more banking reserves. This increases money supply, which lowers interest rates (lots of money in the system). If interest rates are going down, investors should be buying treasuries before their interest rates go down (to lock in current rates). Thus, treasury prices, again, should go up. 3) The only plausible reason treasury prices are going down is because some investors are cashing out of the treasuries to invest in stocks. Still, though, (1) and (2) above should not be ignored. Comments?
Say what? Who said the Fed is buying Treasuries? The Fed rarely “buys” Treasuries even in open market operations. If they did, whenever the Fed bought Treasuries their price would almost certainly go up by having a 900-lb gorilla in the market. Today’s Fed action is about lending money to investment banks based on crappy collateral. I think this is a violation of “equal protection” so I have filed a lawsuit asking that the Fed lend me money based on using my old sneaker collection as collateral. It is similarly difficult to price as most of the stuff the Fed is now accepting. The smell test suggests that they are very similar to the fine securities that are dragging down the IB’s the Fed hopes to save.
I didn’t read the news really, I just assumed teh Fed was buying treasuries. It looks though the Fed is buying MBS’s from the MBS bozos, and paying the bozos with treasuries. This makes sense now, since the bozos will soon get rid of their treasuries for cash, hense the drop in prices. Makes sense to you?
The exact plan is " the Fed will lend up to $200 billion of Treasuries to primary dealers secrured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency MBS,a nd non agency-AAA rated private-label MBS" So, it’s not hard to understand why the Treasuries went down - because Fed is injecting Treasuries to the market. Another indirect reason is the anticipation of 75 basis point rate cut of next week shrank. Big players, who previously collected Treasuries in anticipation of the big rate cut, are dumping them now.
BTW - I think this whole plan is quite stupid.
Does greater fool theory ring a bell?
The greater fool is the taxpayers. So these investment banks who are holding crap borrow a bunch of Treasuries, repo them and get a bunch of cash, then they go out and invest the cash in, uh, I dunno, something and lose it. Too bad they still have all this crap they gotta take back from the Fed. Who’s paying the bill?
At this stage of the game, the Fed is the greater fool, as it is the one that ends up with that useless crap…as of today they are buying (a.k.a. bailing out) the crap holders. In the end, you and I are the greatest of all fools. Sad but true.
How am I a fool because the the FEDs questionable monatary policy? Your a fool for thinking the FED was buying treasuries so therefore they went down in price RIGHT after i said the Fed issued currencies, so that part I agree with