Treasurys Update

The Fed is buying Treasurys every day this week.  It says it will also use cash from expiring mortgages to buy more Treasurys increasing total purchases from $600b to $900b.

From WSJ (“Bond Market Defies Fed”):

TUES: Fed buying 2- to 3-year notes

WED: Fed buying 8- to 10-year notes

There may  be a lag in price effect from the announcement date to the Fed purchasing date.  Watch the effect of Fed buying 2- to 3-year notes today and see if the price action is is repeated tomorrow in the 8- to 10-year notes; we are looking for a leading indicator for the 10-years.  Bond shorts should be weary of this decline being a pullback, then rally, and then a further pullback.  Always watch for the shake-and-bake and choose your exit in advance.

So far yields on 2-, 3-, 10-, and 30-year notes are down from yesterday but still up from last weeks levels (via yahoo bonds center).

Lots of action on the floor of the CME pit today. Pit population was gauged at 66% after 12pm EST. Heavy selling in the e-mini, 10-years selling off, dollar up.

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USD Correlation to QE2

Bernanke says QE2 purchase of $600bln in US Treasuries is to create jobs: Theoretically, yields go down pushing investors into riskier assets – market goes up – investors feel richer – spending goes up – businesses hire more workers – economy grows

Reality: Yields are already at all time lows and businesses are not hiring because of a lack of demand. The Fed is in an exchange-rate war to push down the USD, dubbed a form of “financial aggression” by Michael Hudson. The plan puts the dollar under severe pressure and emerging markets will throw up protectionist barriers and monitor capital flows to regulate their own currency. The potential effect is a weakening of currencies across the board.

Q: Why would the USD go lower?

A: Quantitative Easing is another word for printing money and flooding it in the market. Increased supply devalues the dollar.

Q: Why would the USD go higher?

A: QE2 news is built into the market. USD is at all time lows. Bernanke is being pressured not to flood the market with a this second round of excess capital. During market weakness, investors look to move capital to less risky assets (out of the market and into metals and USD).