Wednesday, 18 March 2009

Anything you can do...

Anything you can do,
I can do better.
I can do anything
Better than you.

No, you can't.
Yes, I can. No, you can't.
Yes, I can. No, you can't.
Yes, I can,
Yes, I can!
Following the Bank of England's recent announcement that it intends to purchase £75 billion of Gilts, the Fed announced today it will purchase up to $300 billion of long dated Treasuries over the next six months. Beat that Mervyn!

Despite being a drop in the ocean (c. 2.7%) relative to the $11 trillion of outstanding public debt, $300 billion was enough to push yields down significantly. Longer dated Treasuries surged on the news, with 10 year yields falling 47 basis points to 2.54% and 30 year yields fell 37 basis points to 3.46%. The 10/2's spread flattened 37 basis points 1.62%.

However, the move stoked fears of inflation and currency debasement, pushing gold 6% higher. Bloomberg reported that:
The dollar fell the most against the euro since September 2000 as the Federal Reserve said it will purchase $300 billion of longer-term Treasuries, spurring speculation the central bank is debasing the currency. The dollar depreciated as much as 3.3 percent to $1.3493 per euro before trading at $1.3468 at 3:20 p.m. in New York. The dollar lost 2.5 percent to 96.17 yen from 98.60. The yen dropped 1.1 percent to 129.44 per euro from 128.35. The Dollar Index, which the ICE uses to track the greenback’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, dropped 2.7 percent to 84.595. The gauge fell 5.6 percent since reaching 89.624 on March 4, the highest level since April 2006.
Quantitative easing is now de rigueur amongst the world's major central banks. The Bank of England is buying government bonds and corporate debt, the Bank of Japan is snapping up government notes and making subordinated loans to banks, and the Swiss National Bank is intervening to weaken the franc. Naturally, anything the rest of the world can do, America can do it bigger and better...

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