You'll remember the basic logic from Economics 101 that decreasing demand for a product will cause the price to fall, assuming the supply of that product is relatively fixed. Likewise, increasing demand will cause the price to rise. On the other hand, increasing supply will cause the price to fall, assuming the demand for that product is relatively fixed. Likewise, decreasing supply will cause the price to rise.
The same basic logic applies to U.S. Treasury bonds. The announcement by the Fed that Quantitative Easing (QE) will end this month means the demand for bonds will decrease by $15 BILLION next month, which suggests that interest rates (the price of the product) will fall.
Then, the basic logic breaks down. It has never happened that the Federal government was unable to sell all the bonds it wanted, because they simply raise the interest rate enough to entice more buyers. The bad news is that paying increased interest expense is taking money out of taxpayers pockets.
So, who will take the place of the Fed to maintain demand for Treasury bonds and mortgage-backed-securities (MBS), to keep interest rates from rising too much? Conveniently, one of the new banking requirements is increased holding of liquid securities, such as Treasury bonds and MBS. This liquidity requirement is at least 30 days of operation held in highly liquid assets, and banks must be "mostly compliant" by year-end.
(At the same time, don't forget the supply of new Treasury bonds has fallen by two-thirds since the global financial crisis. In other words, the Treasury doesn't have as many bonds to sell each month as they did when QE started.)
In mid-November, there is a meeting of the G-20 in Australia, which is likely to also require some increased liquidity requirement on banks worldwide, further fueling demand for U.S. Treasury bonds and MBS. Isn't that convenient?
While the end of QE does frighten the stock market, it will pass. Interest rates will not soar. The world will not end.
The same basic logic applies to U.S. Treasury bonds. The announcement by the Fed that Quantitative Easing (QE) will end this month means the demand for bonds will decrease by $15 BILLION next month, which suggests that interest rates (the price of the product) will fall.
Then, the basic logic breaks down. It has never happened that the Federal government was unable to sell all the bonds it wanted, because they simply raise the interest rate enough to entice more buyers. The bad news is that paying increased interest expense is taking money out of taxpayers pockets.
So, who will take the place of the Fed to maintain demand for Treasury bonds and mortgage-backed-securities (MBS), to keep interest rates from rising too much? Conveniently, one of the new banking requirements is increased holding of liquid securities, such as Treasury bonds and MBS. This liquidity requirement is at least 30 days of operation held in highly liquid assets, and banks must be "mostly compliant" by year-end.
(At the same time, don't forget the supply of new Treasury bonds has fallen by two-thirds since the global financial crisis. In other words, the Treasury doesn't have as many bonds to sell each month as they did when QE started.)
In mid-November, there is a meeting of the G-20 in Australia, which is likely to also require some increased liquidity requirement on banks worldwide, further fueling demand for U.S. Treasury bonds and MBS. Isn't that convenient?
While the end of QE does frighten the stock market, it will pass. Interest rates will not soar. The world will not end.
