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Twisted Tuesday – Treasuries Are Not an Option

Posted on the 27 December 2011 by Phil's Stock World @philstockworld

Last week, Freddie Mac reported record lows on rates, with the 30-year notes at 3.91%.  This has not, of course, encouraged many people to go out and buy homes but it has DISCOURAGED people from putting their money into bonds and ENCOURAGED them to put their money into stocks.  There is, however, a problem with this.  When people put money into Treasuries, it is "locked up" for a period of time but stocks are more liquid so, as soon as rates begin going up (and they will when the panic in Europe subsides despite the Fed’s efforts), then money can come out of stocks as quickly as it went in and move into 5% paper

See, I said 5% paper and you were thinking "Yeah, I’d like some of that."  So are Trillions of Dollars worth of other investors and that means, I am sorry to tell you, that this little Federally-funded rally is full of holes you can drive a truck through.  

Twisted Tuesday – Treasuries are not an Option
The Fed’s stimulus plan is the central bank’s third definitive attempt to aid the U.S.’s patchy economy since 2008. As expectations grew that the Fed would act in the weeks leading up to the bank’s actual announcement, which came Sept. 21, 10-year yields dropped nearly 0.30 percentage point. Since the Fed’s official statement, yields have already risen modestly, to 2.026% on Friday, from 1.95% on Sept. 20.

The program’s final debt purchase of the year was Thursday, when the Fed bought $4.6 billion in long-dated securities. The final sale Wednesday targets $8 billion to $8.75 billion worth of notes due in 2014. It will be a holiday-shortened week: The bond market was shut Monday and will close early, at 2 p.m., on Friday.

The problem is some corners of the market think the Fed’s tools are losing their punch. The financial system is already flush with money from the bank’s previous easing programs, and analysts argue that the Fed’s extra money is increasingly less useful. Borrowing costs, for instance, are at all-time lows and yet many investors aren’t taking advantage.  If Operation Twist isn’t enough to get us through 2012 – what’s going to be left in the Fed’s tool belt once the Global panic into Dollars begins to subside?  

 

Twisted Tuesday – Treasuries are not an Option

You can see, on the above chart, where the Fed announced Operation Twist in September as…



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