Long-Term Treasuries See Some Love

Good day… And a Tub-Thumpin’ Thursday to you. Well, yesterday was certainly one wild Wednesday for the record books. It started out like any other day we’ve had over the past week or so, with the dollar down and many of the currencies up a bit, but nothing really out of the ordinary. Then it happened…the Fed adjourned and hit the markets with a big one.

Many of the market participants weren’t looking for an announcement, or plans from the Fed to buy Treasuries today… They were anticipating further discussions on how to proceed. It appears there has been disagreement on how to provide aggressive actions with interest rates already at rock bottom. The way they saw it, there were three options: 1. Increase the Term Asset-Backed Securities Loan Facility (TALF) to buy frozen assets, 2. Expand purchases of mortgage backed securities and agency securities, or 3. Begin buying long-term Treasuries.

The Fed decided to go ahead and buy $300 billion of longer term Treasuries over the next 6 months to help improve conditions in private credit markets. The central bank will begin purchases of the Treasuries late next week and buy them 2 to 3 times a week and concentrate in 2-year to 10-year debt. In addition, they said, “To provide greater support to mortgage lending and housing markets, the committee decided to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities.” These additional purchases kick the tally for the past year up to $1.15 trillion.

The Fed also said they will consider expanding the TALF to include other financial assets. Broadening the TALF to include older, illiquid and lower rated securities could allow investment funds to repackage assets and sell them to a wider audience. In other words, the TALF would provide loans to investors and agree to take this illiquid debt as collateral. The Fed will also increase its purchases of agency debt this year by up to $100 billion to a total of $200 billion.

The 10-year note yields plunged to 2.48% from 3.01% late yesterday and marked the biggest decline since 1962. Since most mortgage rates are based on the 10-year, they are trying to drive rates down as they haven’t been falling with the traditional Fed rate cuts. Former St. Louis Fed president Poole said, “We are not even close to the bottom and therefore the Fed is engaging in a massive quantitative easing. We still have a very serious recession in front of us.” Quantitative easing is the injection of funds into the economy as the main policy tool. This type of policy may continue until the Fed feels more comfortable. Oh, and by the way…rates were left unchanged in case you were wondering.

Now, with all of that being said, the dollar sold off quicker than funnel cakes at a state fair, as Chuck would say. What we have here is a situation where the printing presses are running so much that they are about to overheat. Generally when we have money thrown from the helicopter and the government buying this much debt, it will ultimately cause inflation to soar. At this point, the only concern the Fed has is trying to stabilize the economy. It really isn’t worried about heightened inflation or any other negative repercussions.

As Chuck has said on many occasions, when rates or yields fall, one of two things need to happen in order to attract capital. One is to increase rates, which we know isn’t going to happen, and the other is a general debasement of the currency. Well, the currency markets figured it out right when these moves were announced that a weaker dollar is what will be necessary to make the wheels turn… Not to mention that higher inflation, which is not a positive attribute for a currency, is the end result. It seems that what Chuck has been harping on for a long, long time is now coming full circle.

This had to be one of the quickest currency moves that I have ever seen, as the euro (EUR) flew all of the way up to the 1.35 handle before I left for the evening. It was literally like watching the speedometer on your car climb as you push the pedal to the floor. The numbers just kept going and going…blowing past 1.31, then 1.32, and finally up to 1.35. We had the Swedish krona (SEK) gain over 8%, Norway (NOK) and New Zealand (NZD) up around 6%, and the euro up 5% just to name a few.

The Dollar Index fell 2.7% yesterday to 84.595 – its largest one-day drop since 1971 – and increased the dollar’s decline to 5.6% since March 4. As I came in this morning, there hasn’t been any type of sell-off, and the currencies remain in the same range as where we last left them, with the euro holding the 1.35 mark. Gold also joined in on the mugging as it was trading around $940, when just several hours prior it had even dipped below $900. These types of huge movements obviously can’t be sustained, so I’m sure we’ll see some type of correction, but remember what happened on the way down. We had a few massive movements downward and then a steady depreciation for several months. I’m not saying this will happen, but it’s certainly possible to see the currency market appreciate as quickly as we saw it fall.

In the midst of all the action, we did have some economic releases that I’ll mention as well. The second piece of inflation came out today and actually rose more than expected from January by 0.4% and pushed the annual core inflation rate to 1.8%, up from 1.7%. We also had the fourth quarter current account deficit narrow more than expected to $132.8 following a revision to the previous figure of $181.3 billion from $174.1 billion. Today we have jobs numbers, leading indicators, and the Philly Fed Index, which are all expected to fall from previous numbers. On to the Big Finish…

Currencies today 3/19/2009: A$ .6817, kiwi .5461, C$ .8062, euro 1.3519, sterling 1.4314, Swiss .8786, rand 9.6275, krone 6.4437, SEK 8.0576, forint 220.77, zloty 3.3497, koruna 19.8855, yen 95.58, sing 1.5172, HKD 7.7516, INR 50.3112, China 6.8284, pesos 13.9501, BRL 2.2495, dollar index 84.028, Oil $49.70, Silver $12.86, and Gold… 937.17

That’s it for today… Hopefully I was able to shed some light on that wild ride from yesterday. There was a lot to talk about, and it was more “numbers” intensive than usual, so it was a little on the dry side today… But I tried my best to throw it out there for you. March Madness officially begins today so good luck on those brackets. It’s going to be a busy day here on the desk, so until tomorrow… I am outta here. Have a Tub Thumpin’ Thursday!!