From the May 01, 2009 issue of Futures Magazine • Subscribe!

Federal Reserve in market for Treasuries

With short-term interest rates set at zero to 0.25%, one of the few ways left for the Federal Reserve Bank to affect U.S. interest rates is through direct purchases of Treasuries. After hinting for several months, the Fed pulled the trigger on March 18, announcing a plan to purchase up to $300 billion longer-term Treasury securities over the next six months.

The Federal Reserve Bank of New York bought $7.5 billion in Treasuries on April 2 and $2.53 billion in Treasury coupons on April 6.

Jack Broz, president of The Marlin Letter, says that in the long term, the buyback program is keeping a bid in the market. “It’s an ongoing program — [the Fed] made it clear that they’re going to be in there buying. So traders don’t want to get short,” he says.

Jay Feuerstein, CEO and CIO of 2100 Xenon Group LLC, says commodity trading advisors are being hurt by the buyback program because of two opposing forces.

“There’s the force of market expectations for some sort of rebound and then there’s the other force of the Fed and the Treasury buying securities to narrow mortgage rates. You’re caught between two things — the Fed doing what it wants to do and the market doing what it wants to do,” he says.

Feuerstein says that ultimately something has to give. “Either this won’t work and the Fed will stop doing it and try something else, or the markets will continue to overpower it and it will be a choppier ride and you’ll see markets go where they’re supposed to go based on fundamentals and technicals. These outright purchases are good and the Fed continuing to buy securities is good but [Federal Reserve Chairman Ben Bernanke] and the Treasury have to get their acts around some of the troubled real estate so they can clean up the bank balance sheets. In the meantime, the Fed will be running in with these purchases, it will disrupt the markets in the short term and then things will go back to where they’re supposed to be,” he says.

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