Aug 11. Fed downgrades econ view. QE lite

Aug 11. The Fed downgraded its assessment of the US economy and said it would reinvest MBS and agency paper into treasuries in order to maintain the size of its balance sheet (to the tune of about $25-30 billion per month). Given $40 billion being auctioned today and tomorrow in tens and bonds and the House passage of a $26 billion bill to assist state and local gov’ts, this month is probably spoken for.  Actually, foreign demand will probably tell the ultimate tale of whether 2.75% ten year yield is justified in this environment.   Note that US productivity is falling and a JPM retail analyst found that food prices in Walmart were up 5.8% last month.
–Additionally, China is taking further steps to curb lending.  BBG reports that banks are being told to move off-balance sheet loans back onto the official books.  The US eases as China restrains.     
–The curve flattened to new recent lows with 2/10 spread down to 225 bps.  Red pack to deferred contracts also made new lows with red/green pack spread at only 72 bps. 
–The Fed seems to be following the same playbook that Greenspan used when he was tightening policy by small, telegraphed 25 bp increments in 2005 and 2006.  Namely, to let the market dictate the policy and then mollify with expected results.  It works until it doesn’t.

Posted on August 11, 2010 at 3:38 am by alexmanzara · Permalink
In: Eurodollar Options

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