Morgan Stanley’s Caitlin Long, tells David Faber and Gary Kaminski why Fed policy is killing capital.
Financial System Claims are 30 times the treasury yields and as a result when you get into these giant margin call situations where credit risk expands and the financial sector calls for margin, they call for cash, treasuries and agencies. So you have this sort of artificial non-fundamental demand for treasuries that help in these situations to drive yields lower but it’s artificial.
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I think another major point that people miss is that the Treasury yields aren’t being driven by private market actions but primarily sovereign debt holders and the Federal Reserve itself. Private purchasers make up such a tiny portion of the market that private ownership preferences for Treasuries will have absolutely no impact on the market itself. Even the “private” portion is overwhelmingly the USPS pension system, which makes up somewhere around 1/4 to 1/3 of the total amount outstanding. These moves are mostly due to stimulus efforts, like the Federal Reserve’s buying binge that basically purchased every single Treasury that came off the presses for a good two years and then some.
For the basis of her presentation, see the document here: http://www.cobdencentre.org/2011/09/funding-markets-and-your-business-plan/
An all around incredibly written article!!!
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