The Federal Reserve is expected to announce a slight reduction in it's current QE to erternity efforts by reducing it's purchases of treasuries and perhaps reducing it's purchases of mortgage debt. At the same time, the Fed "hopes" to keep it's record low interest rate policy intact.
One argument suggesting tapering should commence is that the federal deficit is coming down and consequently, the current level of Federal Reserve debt purchases might exceed the issuance of new U.S. debt in the coming months. (which assumes the falling deficit will not reverse direction anytime soon).
But the larger question remains as to who will step up to the plate to purchase all of that maturing treasury debt that is presumed to be just "rolled over" by whomever holds the debt. Not so fast, Tonto! 30 year treasury bonds issued in Sept, 1983 garnered an interest rate of 11.63% which rose to 12.54% in Aug '84 before starting a slow trend to lower rates. Japan and China, as well as numerous other central banks have been reducing their treasury holdings. And what pension fund will be willing to roll over an investment yielding 11.63% to the current yielding 3.76%? Most pension funds are drastically underfunded even though they assume rates of return well north of 7%. 10 years ago ten year treasuries yielded 4.27% and currently yield a paltry 2.85%. Not exactly a "dream return" for pension funds as well as anyone else invested to live off a decent return (think negative interest rates with an understated inflation rate). Pension funds will be dumping 30 year treasuries from their portfolio's.
The Fed knows interest rates will ratchet up much higher if the Fed does not step up to the plate and purchase all this "rollover" treasury debt now coming due......since nobody else will. Interest rates, by necessity, will have to rise to attract new buyer interest. Say goodby to the Fed's expectations of maintaining low interest rates. Say goodby to tapering. Got gold?
Fed has been spending more than $85billion per month. From Eric Sprott today:
"According to data compiled by Bloomberg, the Fed’s balance sheet has been increasing at an average rate of $91.9 billion each month during 2013 – yes, more than the $85 billion headline number. While the Fed has been buying assets at a rate of $85 billion per month, they have also been further adding to their purchases by investing earned interest and proceeds from maturing bonds. The largest single monthly addition to their balance sheet in 2013 was during the month of April when the Federal Reserve added $114.7 billion of assets, almost $30 billion more than the stated purchases of $85 billion. These monthly additions vary given the timing of maturing bonds but the accommodation provided by the Fed is much larger than the headlines suggest."
Maybe the Fed should just taper down to.....$85billion per month.....just to say they tapered!
Good judgment Quail. I had thought that it was possible for a small taper. I though that it was important to watch buying and covering reactions from banks (including notes, Ts) before the announcement as they are notified first (previous post). I bought a few cheap shares, futures and options quickly when I saw a movement. Not enough, but I'm glad for you and others. Again, well done. LOL
yeah, I got a little gold...
No, the Fed can't taper, they got to keep rates ultra low, got to prop up the banks.
We got big problems in the economy, gold and silver seemed headed much higher.
Sentiment: Strong Buy
Blade, I remember those days just as well. I bought a house in early '84 and financed the mortgage with a 15 year loan in order to bring down the fixed interest rate over that of a 30 year mortgage. I felt blessed and happy to lock in at 12%.
Interest rates may never return to those levels but we can assure ourselves that the record low interest rates of today will not last much longer. I always wonder how a massive increase in the nation's interest expense due to rising interest rates will be spun by our finger pointing politicians. Every interest rate rise of 1% (of the blended total of federal debt) means an additional $170 billion of taxpayer expense (which pays for virtually nothing, ie services, wages, capital improvements). Just think....if the interest goes up by 3%, we'll have to come up with an additional $580 billion of revenue just to cover the interest rate rise! Ouch!