Fed Researchers: Fed's $300 Billion Treasury Shopping Spree Succeeded In Driving Down Treasury Yields

Fed researchers Stefania D’Amico and Thomas B. King have come out with some encouraging news for easy money whores looking to continue pushing the easy money crack: Last year's $300 billion Treasury shopping spree by the Fed succeeding in driving down Treasury yields across the board, by as much as 50 basis points in some instances.

Here's the premise:
Using a panel of daily CUSIP-level data, we study the effects of the Federal Reserve’s program to purchase $300 billion of U.S. Treasury coupon securities announced and implemented during 2009. This program represented an unprecedented intervention in the Treasury market and thus allows us to shed light on the price elasticities and substitutability of Treasuries, preferred-habitat theories of the term structure, and the ability of large-scale asset purchases to reduce overall yields and improve market functioning. We find that each purchase operation, on average, caused a decline in yields in the sector purchased of 3.5 basis points on the days when these purchases occurred (the “flow effect” of the program). In addition, the program as a whole resulted in a persistent downward shift in the yield curve of as much as 50 basis points (the “stock effect”), with the largest impact in the 10- to 15-year sector. The coefficient patterns generally support a view of segmentation or imperfect substitution within the Treasury market.
The "success" of this program is allegedly based in yields and has nothing to do with funding the operations of the U.S. government for a few more months while they search for a greater fool to buy Treasurys (even remedial personal finance books for beginners will tell you to stay the hell away). Therefore the paper's authors call victory in this respect, while politely pointing out that they didn't actually check to see if this program actually made borrowing cheaper (how could it?) nor if any of this was actually passed along to the greater economy. I think we all know how that turned out and don't need to waste any Dirty Fed researcher time by having them figure it out for us.
We view these results as economically important. A decline in longer-term Treasury yields on the order of 30 to 50 basis points is large by historical standards. Moreover, if this decline had indeed been passed through to private credit markets, it would have represented a substantial reduction in the cost of borrowing for businesses and households. Although we do not test whether this pass-through actually occurred, the observation that most credit spreads declined during the life of the program suggests that at least some of it may have. It thus appears that the Treasury LSAP program was probably successful in its stated goal of broadly reducing interest rates, at least relative to what they would otherwise have been.
Ummm call me crazy but can't the banks borrow money from the Fed for nothing? Why would they risk loaning it to you and your broke ass when they can just borrow it from Bernanke for nothing and then get paid to keep it at the Fed? HELLO! Do we need research for this?

All this accomplished was making borrowing slightly cheaper for the next day's Treasury shopping spree, which doesn't matter to the Fed because it isn't their money and as long as we can pay our bills they'll get it back from the Treasury eventually. Interest, bitch, read up on it, we don't get those FRNs out of the kindness of the Fed's heart you know.

Maybe I'm just a stupid blogger without an econ degree but can someone please explain to me what benefit this had for the greater economy? Had yields not been monkeyed with the market would have priced them accordingly, meaning no one but Bernanke and his FOMC fanboys would touch the things and for good reason. Perhaps higher yields were the market's way of pricing in fear, panic and a total lack of faith in the United States to get it together. What's so wrong with that?

Mission accomplished? WTF was the point?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Anonymous said...

Succeeded in making a crony flush I'm sure too!!!!!!!!!!!!

As Grant says: "Willis was present at the creation of the Fed, he was
one of the draftsmen of the Federal Reserve Act of 1913. Willis was
also the first secretary of the Federal Reserve Board - he knows this
institution. He wrote a book in 1936, which was a lamentation about
the low estate of Central Banking in America, the Fed had lost its way
in 1936. It had opened its doors in 1914 and by 1936 it had eaten the
forbidden fruit, it was in the business of guiding the economy, of
managing the economy, of manipulating this aggregate and that, and
Willis said: "For Pete's sake. You can't know that - the GDP data are
not reliable enough for you to do what you think you are doing." It's
a wonderful tract against the tendency of the Fed to do what it has so
lethally done to this economy in my opinion, which is to steer us, in
the interest of raising the GDP it presses interest rates to zero,
pouring out immense volumes of econometric studies in support of this
dubious enterprise. Hey Fed: just attend to the dollar, that's it, no
inflation, just do one thing! You've heard of mission creep, these
guys are the mission creeps par excellence."


Special Report: The ties that bind at the Federal Reserve
(Reuters) - To the outside world, the Federal Reserve is an
impenetrable fortress. But former employees and big investors are
privy to some of its secrets -- and that access can be lucrative.

But a Reuters investigation has found that the information flow
sometimes goes both ways as Fed officials let their guard down with
former colleagues and other close private sector contacts.

This selective dissemination of information gives big investors a
competitive edge in the market. In the past, Fed officials themselves
have privately expressed discomfort about the cozy ties between the
central bank and consultants to big investors, though their concerns
have largely fallen on deaf ears.

No one is accusing Meyer and his firm, Macroeconomic Advisers -- or
any other purveyors of Fed insights for that matter -- of wrongdoing.
They are not prohibited from sharing such information with their hedge
fund and money manager clients.