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Treasuries: Here we go again?

by on August 10, 2011

Via “The Marketplace Morning Report:”

JEREMY HOBSON: Global stock markets are still excited about what the Federal Reserve said yesterday afternoon. That interest rates for banks that borrow from the Fed will remain near zero percent for the next two years. That’s the Fed’s way of influencing the rates we pay for everything from student loans to mortgages.

Keeping rates that low for that long is unprecedented and making such a bold statement… carries its own risks…

Via “This American Life:”

Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.

Adam Davidson: You might not believe me, but that little statement, that is central banker’s speak for, hey, global pool of money, screw you.

Alex Blumberg: Come on, that’s not what he said.

Adam Davidson: It is. I speak central banker. Believe me, that’s what he said. What he is technically saying is he’s going to keep the fed funds rate– that’s when you hear, the fed interest rate– at the absurdly low level of 1%.

And that sends a message to every investor in the world, you are not going to make any money at all on US Treasury bonds for a very long time. Go somewhere else. We can’t help you.

And so the global pool of money– which does speak central banker. They understood what he was saying– they looked around for some low-risk high-return investment. And among the many things they put their money into, there was this one thing that they fell in love with. To get it, they called Wall Street, a guy like this.

Mike Francis: My name is Mike Francis. During the beginning of the mortgage implosion, I was an employee, executive director at Morgan Stanley on the residential mortgage trading desk.

Adam Davidson: Mike was one link in a chain that connected the global pool of money to its new favorite investment, residential mortgages, the US housing market, and guys like Clarence Nathan. Think how attractive a mortgage loan is to that $70 trillion pool of money.

Remember, they’re desperate to get any kind of interest return. They want to beat that miserable 1% interest Greenspan is offering them. And here are these homeowners paying 5%, 9% to borrow money from some bank. So what if the global pool could get in on that action?

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