BIGCAPITAL's Blog

November 12, 2010

Fed to buy $105B worth of bonds in first phase

Filed under: Uncategorized — bigcapital @ 8:52 am
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Fed to buy $105B worth of bonds in first phase

The euro was little changed against other major currencies. At present, the euro is worth 1.3771 against US Dollar

WASHINGTON (AP) -Thursday, November 11, 2010- The Federal Reserve will buy a total of $105 billion worth of government bonds starting later this week as it launches a new program to invigorate the economy.

The bonds will be purchased through a series of 18 operations that start on Friday and end on Dec. 9, the Federal Reserve Bank of New York said Wednesday. The purchases are the first since the Fed announced last week that it will buy a total of $600 billion worth of Treasury bonds over the next eight months.

The Fed will buy $75 billion of government debt as part of the new program. And, it will buy another $30 billion, using the proceeds from its vast mortgage portfolio.

That totals $105 billion for the first phase of the Fed’s government bond buying. The Fed last week said it anticipates buying on average $110 billion a month.

The Fed’s announcement on Wednesday helped boost stocks and bond prices.

— The Dow Jones industrial average closed up 10.29 points to 11,357.04.

The euro was last at $1.3771 , little changed from late Wednesday in New York

— Treasurys moved higher after the auction of $16 billion in 30-year bonds and after the Fed laid out its bond-buying schedule.

In late afternoon trading, the 10-year note was up 37.5 cents on the day. The slight gain lowered the yield to 2.65 percent from 2.66 percent late Tuesday as bond prices and yields move in opposite directions. The yield on the 2-year note inched lower, from 0.45 percent to 0.43 percent. The 30-year bond traded at 4.25 percent, compared with 4.24 percent late Tuesday.

Through the bond purchases, the Fed intends to push rates even lower on mortgages, corporate debt and other loans. Mortgage rates have sunk to their lowest levels in decades just in anticipation of the Fed’s action.

The goal: Cheaper borrowing costs will lure Americans to boost spending. Lower corporate bond rates will spur business investment. Higher stock prices will boost households’ wealth, which was clobbered by the recession. Fed Chairman Ben Bernanke said such a chain of events would produce a “virtuous cycle, which will further support economic expansion.” Faster economic growth in turn would prompt companies to boost hiring.

However, some Fed officials and economists don’t think the program will do much to rev up the economy and lower unemployment, which has been stuck at 9.6 percent.

And, there’s fears inside and outside the Fed that the program could lead to new problems: runaway inflation and inflated prices for commodities, bonds or stocks, creating new speculative bubbles. Gold prices have jumped. Some investors see the precious metal as a hedge against inflation.

The Fed’s program also has struck a nerve overseas. China and other countries have complained that the Fed’s bond-buying program could hurt them. Because the Fed’s program could weaken the U.S. dollar further, that makes other countries’ currencies more expensive, cutting into their exports, and fueling inflation.

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