Blog 1
Article: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/09/30/bloomberg_articlesLSBA1T0UQVI9.DTL
Federal Reserve's new monetary policy was implemented last week called "Operation Twist". What the central bank's objective is to buy up longer term treasury bonds to decrease long term yields (bonds prices and yields are move inversely) while buying shorter term treasuries, and thereby increasing shorter term yields. The federal reserve intervenes in the bond market through FOMC (federal open market committee) in order to stabilize markets in time of financial distress and liquidity problems as well as provide long term outlook on the economy and appropriate monetary policy.The policy of 'twisting' the bond yield curve has several intended effects. Firstly, lower yields on the longer term treasuries decrease the net interest payments for the US federal government to foreigner and domestic buyers of US debt instruments. Since most of the debt is financed through long term bonds (10 year and longer), interest payment reduction on majority of US debt would have a net positive impact on US federal government's cashflow. At the same time, higher yields on shorter term tresury instruments would create an appeal to invest in the US dollar in the short run, buy buying, for example, 3 month treasury notes. In addition to this, higher demand for US dollar would drice capital away from the recent commodities bubble, espceially in the precious metals sector). This would benefit majorority of American's as high commodities prices translate into inflated future's markets and therefore direct higher food and energy prices. Another positive impact on Americans is the lower mortgage rates as a result of lower yields on long term US debt. Both are positively correlated and lower interest rates on US debt prices in lower rates on long term mortages, so Americans are able to purchase homes and support the weak housing market. A fascinatin aspect about the financial markets is the fact that most of the trading today is done eletronically over the internet as oppose to open outcry an phone lines as was done before the 80's. This adds multiple layers of complexity into the global network of currency market (forex) and the bond market (US treasuries). FIrstly the time aspect of this. investors and traders around the world have 24 hour access (axcept weekends) to the financial markets. There multiple platforms to trade on and trading is even done pre-hours and after-hours in many cases. The forex market is continuous 24/7 market without borders or formal central regulation other than localized regulation in domestic contries. The SEC regulates financial markets in the US. However, the fact that there is always players in the market and the buy and sell button is only a click away, this creates large volatility swings in the price. FInancial asset prices go up and down by 5-10% on very volatile days. To add another layer of complexity, the incredble leverage readily available in the market, especially in the currency market (up to 50-1 leverage offered by some brokers), this adds more volatility to the market because people are using large financial leverage which wipes out some players completely during large price swings. The Federal Reserve is performing sound monetary policy to protect American interests and stabilize the business cycle as to increase employment and wealth levels of American citizens. As mentioned earlier, foreign interest payments on the US debt would go down, and at the same time the US dollar would enjoy increased demand by foreigners which should stymie dangerously rising commodity prices that negatively impact the US economy.Comments
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