Thursday, 19 March 2009

Fed's Plan to Buy Longer-Termed Treasuries, Agency Debt Should Lead to Dollar Drop, Rising Stocks, Bond Markets Across Latin America

The Federal Reserve's decision to buy long-term Treasuries might be one of the most aggressive policy steps taken by U.S. policymakers during this crisis. This, apart from sparking much-needed momentum to debt refinancing, should lead to a weaker dollar, a narrowing of mortgage rates spreads and a decline in the 30-year Treasury bond yield, and leeway to refinance the U.S. fiscal deficit. Two analysts told us in e-mailed replies to questions that the move bodes well for Latin America -- as it might propel a rally in some of the region's most traded currencies (the Brazilian real, the Colombian and Chilean pesos, etc.) and set a stable, permanent floor to some stock markets.

The Fed wrote in its statement yesterday that, in order to ''provide greater support to mortgage lending and housing markets,´´ policymakers increased ''the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.´´ Moreover, ''to help improve conditions in private credit markets,´´ the Fed decided to purchase up to ''$300 billion of longer-term Treasury securities over the next six months.´´ The 30-year yield fell from 3.8 percent on Tuesday to around 3.5 percent at the end of yesterday's session.

Bloomberg News led its U.S. market wrap close this way on Wednesday:

March 18 (Bloomberg) -- U.S. stocks and Treasuries surged and the dollar tumbled after the Federal Reserve unexpectedly announced plans to buy $1 trillion of bonds in an effort to lower consumer borrowing costs and end the recession. The Standard & Poor’s 500 Index added 2.1 percent, extending its rally since last week’s 12-year low to 17 percent. Yields on 10-year notes dropped the most since at least January 1962 after the central bank said it will spend $300 billion buying Treasury debt and up to another $750 billion on bonds backed by government-controlled mortgage companies. The dollar sank the most against the euro since September 2000.

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