Route!!: Investors run for Treasuries
|Stock Prices and Bond Yields both take a dive|
Just look at what has happened today as the markets realized the extent of what Bernanke said in yesterday's speech. The yield dove along with stock prices. Of course when yields go down, that actually means that prices go up. Prices went up as Bernanke committed to buying long term Treasuries.
He said that all the $1.2 trillion that is currently in the Fed's balance sheet will be reinvested in Treasury securities as they pay off. If the full amount ways paid off tomorrow, it would more than double the size of the balance sheet. They only committed to about The market looked that that and realized, I should be buying treasuries, as we reported at EconomyPolitics.
The net effect will be to keep the Fed's mammoth portfolio of about $2 trillion in U.S. Treasury bonds and mortgage-related securities constant, rather than allow the holdings to shrink as securities are paid off. The Fed bought the bulk of those bonds in 2009 via a program that has helped push mortgage rates to record lows.
It also has the effect of flattening the yield curve, which historically has reduced bank profits and dampened enthusiasm for equities. That may give a technical explanation of why stocks took a beating too. Oh that and all the other bad news like the trade deficit, via LA Times:
Fear is gripping financial markets worldwide Wednesday as investors focus on another batch of downbeat economic data.More
Not surprisingly, cash is again fighting to get into the asset endorsed by the Federal Reserve: U.S. Treasury bonds.
The yield on the 10-year T-note has tumbled to a fresh 16-month low of 2.70% from 2.77% a day earlier.
The Fed on Tuesday said it would resume buying Treasuries to try to help the economy by putting more downward pressure on longer-term interest rates in general.
On Wednesday, investors also piled into government bonds of Germany, Britain and Canada, among others -- and bailed out of stocks nearly everywhere.
Equity markets tumbled 2.7% in Japan, 2.1% in Germany and 2.4% in Britain.
On Wall Street, the Dow Jones industrials were off 225 points, or 2.1%, to 10,419 at about 11:30 a.m. PDT. Things were worse than that in the broader market: The average New York Stock Exchange stock was off 3%, on track for the biggest loss since June 29.
Federal Reserve Balance Sheet