Thursday, April 30, 2009

Bond Vigilantes to Fed: F*ck You

The Fed has been embarking on their quest to drive down interest rates by buying longer-term dated Treasuries, Agency debt, and MBS. Originally, the initial announcement at the very beginning of December (shown in the first circle) managed to drive prices up on the 10 year (which is the most often used proxy for mortgage rates since it best approximates the average mortgage life), and inversely, yields down.

However, soon after yields began rising again, presumably because lip service only moves markets for so long. When tangible plans were announced in mid-March (shown in the second circle) that the Fed was going to imminently begin to purchase the debt, this also triggered a massive price spike - and yield drop.

Yield found technical support at its lower bound of the Moving Average Envelope, and surprisingly has been trending higher ever since.

And then, they actually began buying.

And yields rose.

In fact, yield now stands at a level higher than when the Fed plans were initially announced last December. It has now broken through both a long-standing resistance level and its 200 day moving average (EMA). This could be quite bullish and yields may first target the upper bound of the envelope at around 3.4-3.5%. Overbought conditions may have to be worked off as the Relative Strength Index is approaching 70.

So far the Fed has purchased around $75 billion of Treasuries out of a total $300 billion planned for. So, it is true that the efforts are early. Additionally, as far as I can tell from the NY Fed Open Market Operations activity, only a few billion dollars of the 10 year have been purchased. In a market as massive as Treasuries, that is miniscule.

But....

That explanation seems to be one of the biggest problems: Fed intentions amount to trying to boil the ocean...it is seemingly too large.

Rather, what seems to be happening is that foreign investors are becoming ever more wary of seeing the US government attempt to monetize debt and flood the market with new Treasury issues to finance their budget.

There is a fear in the market that the Fed is going to crowd out private capital (i.e., foreign investors). When China takes its ball and goes home, look out below.

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