The Most Incorrect Thing You'll Hear Today

Here’s a intraday chart of the rate on 30-year US government Treasuries.


Photo: Bloomberg

The big drop in rates came right after the Fed announced an extension of Operation Twist, a scheme whereby the Fed sells short term bonds and buys long-term Treasuries.

Now the incorrect thing you’ll hear today is this: That because the Fed says it would buy more long-term Treasuries, and because in theory greater demand for Treasuries causes rates to fall, that the fall in rates is what the Fed was going for.

But actually it’s the opposite. Fed easing causes rates to rise, because people expect more growth and inflation and growth and inflation causes people to dump Treasuries.

So the initial drop in rates reflects the market’s view that the easing the Fed announced wasn’t satisfactory and that the Fed wasn’t going to do as much as expected.

Then of course, rates rose again (along with the rest of the market) on some headlines from Europe about Merkel being willing to expand the use of the European bailout fund to buy more sovereign debt. And that’s a different issue.

But falling rates aren’t what the Fed really wants to see. It wants to see more inflation, more growth, and higher rates. And if the market thought the Fed was doing something that would deliver on that, rates on the 30-year would go up.

Got it?

Click here to read the Fed’s whole announcement >

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