Economy question

[Thue]

Now that Helicopter Ben* printed $1trillion yesterday, I was a bit mystified at one point in the NYT article describing it ( http://www.nytimes.com/2009/03/19/bu...omy/19fed.html).

Why is the yield of bonds falling? I would image that printing more money would make it more unattractive to own bonds (as opposed to fx gold), because your investment can be devaluated out by the money the fed prints?


As an aside, have a look at the dollar versus euro exchange rate. That jump late wednesday is your dollars becoming 3% less worth at a stroke... (the fall early wednesday is an error, because yahoo is inserting the early Thursday data in early wednesday)


*I am aware that it is mostly people who don't like Ben Bernanke who call him Helicopter Ben. As far as I understand the crisis, printing money and throwing it out of helicopters is a good course of action right now for the US economy.

[Blaupanzer]

As far as I know, the Fed is still borrowing the money in the bond market not "printing" it. The chart you show wildly distorts the rate over 3 tenths of 1% of the interest. If the chart showed a scale of 3% to 4%, the irrelevence of the rate changes would be obvious. "People" for the most part do not buy treasury bonds, that is, members of the citizenry on their own. International and national institutions buy T-Notes because they are still regarded as rock solid, no risk of default investments with a predictable, positive return.

So Thue, if there is really a question in there, what is it really? Do you think US bonds are not safe, or that national bankruptcy looms, or that you are being hurt by inflation?

[Kidlicious]

Why is the yield of bonds falling?

Investors are buying them in anticipation of the fed buying them.

[Thue]

The NYT clearly says that the Fed is printing the money.

So even if the jump is not as large as the graph makes it look, why is it in that direction? General angst for the economy in general, fleeing into a safe investment?

http://www.nytimes.com/2009/03/20/bu...arkets.html?hp seems to suggest that the Fed will be printing money to buy government bonds, which would be a good reason why the yield would be falling, as there would be more buyers for the pool of bonds to be sold.

Edit: I just saw Kidicious answered my question.

[Victor Galis]

Also holding bonds does not become relatively less attractive than holding cash if the currency is the same (aside from some considerations based on liquidity). If you're afraid the US will devalue its currency to partially default on its bonds, you're even worse off if you hold your dollars in cash. (You lose just as much and have no interest to offset that loss.)

[Victor Galis]

Edit: Hmm... got a server busy message but the post went through apparently.

[Thue]

True. But wouldn't you be better off buying stuff like shares in production facilities, which should not be affected by falling dollar value (A brick is still a brick no matter how much money the Fed prints)? That would suggest that high inflation should cause people to shift their investment from bonds to shares, no?

[Kidlicious]

Also holding bonds does not become relatively less attractive than holding cash if the currency is the same (aside from some considerations based on liquidity). If you're afraid the US will devalue its currency to partially default on its bonds, you're even worse off if you hold your dollars in cash. (You lose just as much and have no interest to offset that loss.)

But there is speculative risk to bonds. At some point (theoretical maybe) the speculative risk becomes so great that people will demand cash.

[Victor Galis]

edit: See above reason.

The problem with investing in stocks is that right now people just got burned massively by the stock market.

Though given the fall in the dollar and the rise in gold prices, it's obvious people are looking for something more secure.

[Zkribbler]

Yes, we're buying our own bonds. We're borrowing from ourselves.

More money is now chasing the same bonds. Because the bonds are in greater demand, the yields on the bonds can fall.

[Thue]

Yes, we're buying our own bonds. We're borrowing from ourselves.

I am sure you will get lenient payback terms .

[KrazyHorse]

Thue, the reason bond yields dropped is that the Fed basically printed a bunch of money, went into the marketplace and bought bonds (or at least announced its intention to; I'm not sure when they carried/will carry out the operation).

When a new actor shows up and buys a bunch of something then the price of that thing (and similar things) rises. Bond prices and bond yields are inversely related by their definitions therefore the bond yields dropped.

Now, there will of course be some movement out of the bond market by private actors to compensate somewhat (restoring a balance between bond yields and equity yields). So the fed printing money to buy bonds will increase bond prices (dropping bond yields) AND equity prices.

[KrazyHorse]

Now, this is not so very much different from what the Fed usually does in its open market operations (which it uses to fix "the" interest rate). In the case of open market operations the Fed buys and sells short term government debt with money it creates in order to maintain a given yield on this short term debt.

The two ways that this round of quantitative easing differs from the usual Fed open market ops are:

1) Instead of defending a given interest rate (the yield on short term government debt) the Fed is instead purchasing a specific quantity of debt

2) Instead of buying and selling short term government debt the Fed is purchasing longer term debt as well as some mortgage backed securities (?) from what I've heard

[Thue]

Thanks, KH, enlightening answer .

I wonder why the NYT did not include a few lines to that effect in their article.

[KrazyHorse]

a) Reporters are stupid. I'm serious. Even those who work on specific subjects are often ignorant of the basics of those subjects.

b) Even if this particular reporter wasn't stupid he may have assumed that all those who care about details would already know the answer to fundamental questions like this, and that adding in details would simply confuse those who did not already understand