Wednesday, March 18, 2009

FED Money Creation

I would anticipate that the Fed's decision to buy longer term U.S. treasuries will cause mortgage rates to decline.  The 30 year mortgage recently hit 4.89%.  Over 72% of new mortgage applications came from homeowners attempting to refinance existing loans.
The Feds purchases will concentrate in the 2 to 10 area of the yield curve.  MarketWatch
In addition to buying up to 300 billion in treasuries, the FED intends to buy up to 750 million of securities guaranteed by the GSEs Fannie and Freddie.   All of this is pure money  WSJ.comThis action has at least temporarily made the treasuries even less attractive to me on a yield basis. Corporate bonds rallied today, as some money shifted into them possibly to secure a better yield. LQD, an ETF for investment grade bonds, rallied after the Fed's announcement and ended the day up $1.97.  BWX, another holding, jumped 3.36% because investors sold the dollar and the bonds contained in this ETF are priced in foreign currencies.     BWX: Summary for SPDR BARCLAY INTL TB - Yahoo! Finance

It is my understanding that the Fed will also be purchasing inflation protected treasuries.  I own TIP which had a good rally after the announcement. TIP: Summary for ISHARES BARCLAYS TIP - Yahoo! Finance

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