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?