Simit Patel

A statement issued from the Federal Open Market Committee states it is ready to buy Treasuries. Here is the article from Bloomberg.

Implications of Federal Reserve Buying Treasuries

The first and most important implication is that the Federal Reserve is distorting the free market, as it is expanding the money supply to perpetuate a bubble. As such, these actions entice speculators to enter the market. Peter Schiff elaborated on this in an article written several weeks ago.

The more speculative dollars the bubble can attract, the more money it will attract and prevent from going to more fundamentally sound investment opportunities. In this sense, it is bearish for asset classes that have been relatively stagnant or bearish, like equities and commodities. As the Fed will be printing money to buy Treasuries, these actions will have an inflationary effect. I have seen an increasing number of economists expect inflation in the second half of 2009, and numerous money supply indicators turned upwards, I think the Fed's purchase of Treasury bonds will prove to be inflationary. This in turn will introduce greater selling pressure on Treasury bonds, and thus a self-destructive circle could emerge if the Fed chooses to respond with more aggressive Treasury bond buying. Likewise, corporate and municipal bond markets may need to raise yields to match the attractiveness Treasuries can offer due to Federal Reserve stimulus, and may make them interested in seeking a bailout of their own. In this way the "stimulus" package can unleash growing cycles of self-destruction, as it has thus far.

Trading Implications

Treasuries will be guided more by speculation than by economic fundamentals. As such, it is a trader's market. Those comfortable with trading solely on technical analysis may find Treasuries to be appealing.

With that said, the economic fundamentals underlying Treasury bonds are very weak; the US economy is still contracting while it's debt load is growing, and Treasury prices have been declining. Greater inflation will put further pressure on Treasuries. For this reason, I would not be long Treasuries.

As the Fed's actions are increasingly inflationary, and as recent trends show a shift from Treasuries into gold, I think the Fed's statements and intervention into the Treasury market will still be bullish for gold -- even more so from a multi-year perspective.

For other perspectives on the Fed's announcement, I'd recommend Jesse and Eric Janszen.

Click here for a review of the products and services I use to trade profitably.

__________________
My Blog | Quick Guide to IT | IT Sponsors