FOMC Throws a Wrench in the "Short Treasuries" Trade
Reviewing the dangerous "short Treasuries" trade.
Yesterday's press release from the Federal Open Market Committee caught some market participants by surprise with the committee's decision to increase the size of the Federal Reserve's balance sheet by another 50% to more than $3 trillion.
Over the past several months we've heard repeatedly from the various regulators and authorities in Washington that they'll be using all the tools at their disposal to deal with the current crisis. Today's FOMC statements support those claims. Catching many off guard, the committee announced that it has decided to purchase up to $300 billion of longer-term Treasuries over the next six months. According to the release, these purchases are aimed at "improving conditions in private credit markets." However, we could also speculate that the Fed's aim is to keep Treasury yields near historic lows in anticipation of the massive slug of Treasuries it will need to issue later this year to finance its various stimulus and recovery programs. We're not suggesting that this is in fact the Fed's motive; rather our aim is to foster debate and discussion. In any case, the Fed's purchase of Treasuries is an unprecedented move that shows that Bernanke and company are willing to do whatever it takes to revive the economy.
John Gabriel has a position in the following securities mentioned above: BRK.B. Find out about Morningstar’s editorial policies.