What is that link?
Buying longer term treasuries --> higher price ---> lower yield. But don't bond prices that are already in the market just sell for discounts/premiums depending on the opportunity cost...the interest rate in the market already?
How can the increased demand of bonds lead to a decreased interest rate?
| +350 | Evercore Intern Seizure | 56 | 1h |
| +60 | JPM M&A is Gone??? Purely Coverage Banking??? | 30 | 3h |
| +57 | Is DCM actually underrated ? | 24 | 6h |
| +48 | Losing my personality in Banking | 9 | 6h |
| +48 | How do I understand vs. just memorizing? | 6 | 4h |
| +47 | Are all Tech / TMT groups sweaty? | 38 | 8h |
| +42 | Associate & Above IB exits | 16 | 3d |
| +39 | Am I behind? 31 Year Old Analyst | 9 | 2d |
| +32 | Incoming IB Analyst: Best Ways to Prepare? | 10 | 3h |
| +27 | Which groups are ideal for laterals? | 12 | 5h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
your first sentence makes sense, your second sentence is what tha fuck.
bonds are priced depending on supply&demand.
price then determines yield.
so if treasury buys a shitload of bonds yields fall, easy.
The goal of operation twist was to flatten the yield curve. Prior to the fed's move, the curve was very steep -- extremely low rates on the front end and relatively higher rates on the long end.
In order to solve this, the fed sold shorter term treasuries, which increased the supply, decreased the price, thus increased the yield (i.e. the front end of the curve was higher than before the fed's action).
On the long end of the curve, the fed did the opposite - bought longer dated treasuries, decreasing supply, increasing price, thus decreasing yield (lowering the long end of curve).
Now the real question is why the hell did the fed think that lower interest rates on longer term debt would help spur more demand for loan growth when the majority of borrowing is done on short term debt (where rates were already at historical lows and there is still very little demand)?!? The only thing positive outcome is lower mortgage rates, but again, mortgage rates were already extremely low prior to this move.
The other outcome is that bank's net interest margin will shrink, which means less bottom line growth. Hmmmmm....why would the fed purposely squeeze bank margins AND why did the FHA sue the banks? Seems like someone has it out for the banks....
The point of it was to reduce longer term rates as the spread between longer term TSY and borrower costs would theoretically remain the same. This in turn would decrease the cost of borrowing for businesses, and the Fed hopes it will spur borrowing and growth in business as businesses expand at historically cheap levels. The problem is that businesses will still probably refuse to borrow and attempt to grow, even though this is probably a once in a lifetime opportunity (that will last a few years, so they still have time to capitalize on it), businesses wont borrow until they think there is enough consumer demand and growth to warrant the expansion.
The second aspect, squeezing the banks, is to combat the other problem affecting growth (although hard to say how much of a problem this really is), the fact that the banks are "refusing to lend". They are hoping to force the banks to lend more in order to maintain profitability. Lets assume the banks were able to profit 3% for every 1 loan. If you cut that profitability in half, you now need 2 loans to make that same 3%. So you are de facto forcing the banks to issue more loans.
The combination of the two, making borrowing ridiculously cheap and making banks lend more to maintain the same profitability, "should" help spur growth. Now whether this will work or not, who the hell knows.
That's one side of the coin. The other, and another discussion entirely, is tied to our (US) long-term borrowing costs.
In theory, I agree with you....lower longer term rates should increase demand from businesses to borrow. The problem is, businesses do not want to borrow because of the looming uncertainty in both the economy and tax environment. In addition, banks are more than willing to lend; however, all the increased regulation (see Dodd-Frank and Basel III) makes it so much more difficult for banks to do business.
So we are basically f**ked. :)
double post
Voluptatibus laboriosam quis vel nihil. Alias dicta aspernatur tempora velit reiciendis. Quam provident voluptatem possimus et. Modi voluptatem voluptatum quia.
Dolores voluptatem molestiae aut est. Praesentium tenetur qui sunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...