I believe we are going to see language coming from Chairman Ben that basically says fed funds rates could stay at zero for a long time. This will influence financial markets expectations of future short term rates. The only way to bring the long bond yield down to ridiculously low levels is for Mr. Market to believe that it is an accurate discounting of the future.
The 'Deflation and ZIRPMesiterBen vaudville act' reminds me of the scene in ‘Children of God’ where our heroes are trying to escape the farmhouse and the car won’t start so they have to roll it down the hill while trying to turn the engine over.
Seems like the economy is rolling off the cliff and to start it Chairman Ben needs a lot of Treasuries… and he needs a lot of folks to finance the Treasuries he’s loaned out on very short terms lately. U.S. is basically a leveraged hedge fund that ran a naked short on it’s own debt (U.S dollar) but now has to cover it’s short (deleveraging) so what we need is cheap financing (low Treasury yields).
There was a huge duration grab in the bond market yesterday. This means that investors were buying all the long bonds they could. Driven by deflation fears? Yes however swap rates, basically representing private risk versus sovereign risk , also went negative on the long end. This means that investors see a private counterparty as less risky than the government, which obviously is not driven by fundamentals (oh snap the CDS on U.S. sovereign debt is 90 basis points? I think that doubled in about 2 weeks). Although people have theories no one seems to know quite why this is happening, the argument that exotic trades are causing short covering was rumored. The effect is flattening the yield curve, bring the long end closer to the short end.. which is basically zero. The only way to get this condition fundamentally is for folks to have expectations that the rates make sense.
Which takes us back to Chairman Ben having to say fed funds rates could stay at zero for a long time because this will influence financial markets expectations of future short term rates.
4 Trillion is a lot of meatballs to mop up, we’d rather be paying 3% than 8%.