By EDMUND L. ANDREWS
WASHINGTON — Saying that the recession continues to deepen, the Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the mortgage market and longer-term Treasury securities in order to revive the economy.
“Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending,” the Fed said, adding that it would “employ all available tools to promote economic recovery and to preserve price stability.”
As expected, the Fed kept its benchmark interest rate at virtually zero. But in a surprise, it dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.
Indeed, the immediate effect on the bond markets was striking, with prices rising and yields dropping sharply on the news. The yield on the 30-year Treasury bond, about 3.75 percent before the announcement, fell quickly to 3.4 percent and remained volatile.
The action also gave a boost to stocks. The Dow Jones industrial average was down about 50 points before the 2:15 p.m. announcement, but within a half-hour it was up 80 points for the day.
The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on loans of all types.
All of the Fed’s measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. Since last September, the central bank has roughly doubled the size of its balance sheet from $900 billion to nearly $2 trillion — even before Wednesday’s action — mainly because of its efforts to rescue credit markets.
Despite a trickle of encouraging economic data in the last few weeks, Fed officials were clearly unimpressed and in no mood to cut back on their emergency efforts.
Fed policy makers sharply reduced their economic forecasts in December, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment that could approach 9 percent by the end of the year and that there was at least a small risk of an across-the-board drop in consumer prices akin to what Japan experienced for nearly a decade.
Hours before the Fed announced its decision on Wednesday, the Labor Department reported that consumer prices climbed 0.4 percent in January, the second consecutive monthly increase. The news provided some relief from deflation worries, but most analysts still expect prices to remain nearly flat for the foreseeable future. In their most recent forecast, Fed policy makers predicted that consumer prices would rise 0.3 to 1 percent this year — well below the central bank’s unofficial inflation target of nearly 2 percent.
The Federal Reserve slashed its benchmark interest rate to virtually zero in December, declaring that it would keep the rate at that level for “some time” and focusing its additional efforts to revive the economy on a wide range of new lending programs.
In a sign that it is even more worried than at its last meeting in January, the Fed said on Wednesday that it would keep its benchmark rate, the federal funds rate, at virtually zero for “an extended period.” While the central bank had said for some time that it was considering the possibility of buying longer-term Treasury bonds, Fed officials had played down that idea in the past month as they focused their attention instead on more targeted intervention in the credit markets.
In their statement on Wednesday, however, the Fed policy makers offered little explanation for the decision to go ahead with the Treasury purchases after all, saying only that the move was intended to “improve conditions in private credit markets.”
Since last September, new lending programs — including money for bailouts of individual companies like Citigroup, American International Group and Bank of America — have caused the Fed to print new money at the fastest pace in history. But much of that money has remained dormant, because the economic downturn has made banks reluctant to lend and businesses and consumers either reluctant or unable to borrow.
The Fed and the Treasury are in the process this week of starting a joint venture called the Consumer and Business Lending Initiative in their latest effort to revive the still-frozen credit markets. The program will start out by offering $200 billion worth of financing for consumer loans, small business loans and some corporate purposes like equipment leasing.
Fed officials have said they hope to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hope the program will eventually provide up to $1 trillion in total financing.
Verse:
John 3:16; Jn 3:16; John 3
Keyword:
Salvation, Jesus, Gospel
With Operators:
AND, OR, NOT, “ â€
Showing posts with label Treasuries. Show all posts
Showing posts with label Treasuries. Show all posts
Wednesday, March 18, 2009
Treasurys Are 'Disaster Waiting to Happen':
CNBC.com
| 17 Mar 2009 | 05:49 AM ET
The Federal Reserve has no option but to start buying Treasurys as the government's needs for financing are huge, but the government bond market is a disaster in the making, Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC.
Federal Reserve policymakers start a two-day meeting on Tuesday, weighing options on how to spur lending to help cash-strapped consumers kickstart the economy.
Economists expect them to leave rates at zero and look to other ways of boosting liquidity, such as buying government bonds – a measure which has already been taken by the Bank of England.
"Well I think other central banks have done it already around the world but basically what it amounts to is money printing and in fact I don't think that it will help the bond market at all in the long run," Faber told CNBC's Martin Soong.
The yield on the 30-year Treasurys touched a low of 2.51 percent last year in December but now it is back up at 3.77 percent, he said.
"Yields have already backed up pretty substantially and I tell you, I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high," Faber said.
"The Federal Reserve will have to buy Treasurys, otherwise yields will go up substantially," he said, adding that as their reserves were dwindling, foreign investors were likely to scale down their purchases.
But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.
"So we'll go into high inflation rates one day," Faber said.
The stock market is likely to continue its bounce at least for a while, but the outlook is bleak, he added.
"I think we may still have a rally (in the S&P) until about the end of April and probably then a total collapse in the second half of the year sometimes, when it becomes clear that the economy is a total disaster," Faber said.
| 17 Mar 2009 | 05:49 AM ET
The Federal Reserve has no option but to start buying Treasurys as the government's needs for financing are huge, but the government bond market is a disaster in the making, Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC.
Federal Reserve policymakers start a two-day meeting on Tuesday, weighing options on how to spur lending to help cash-strapped consumers kickstart the economy.
Economists expect them to leave rates at zero and look to other ways of boosting liquidity, such as buying government bonds – a measure which has already been taken by the Bank of England.
"Well I think other central banks have done it already around the world but basically what it amounts to is money printing and in fact I don't think that it will help the bond market at all in the long run," Faber told CNBC's Martin Soong.
The yield on the 30-year Treasurys touched a low of 2.51 percent last year in December but now it is back up at 3.77 percent, he said.
"Yields have already backed up pretty substantially and I tell you, I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high," Faber said.
"The Federal Reserve will have to buy Treasurys, otherwise yields will go up substantially," he said, adding that as their reserves were dwindling, foreign investors were likely to scale down their purchases.
But there will be a time when the Federal Reserve will have to increase interest rates to fight inflation, and it will be reluctant to do so because the cost of servicing government debt will rise substantially.
"So we'll go into high inflation rates one day," Faber said.
The stock market is likely to continue its bounce at least for a while, but the outlook is bleak, he added.
"I think we may still have a rally (in the S&P) until about the end of April and probably then a total collapse in the second half of the year sometimes, when it becomes clear that the economy is a total disaster," Faber said.
Saturday, March 07, 2009
Oil Funds Can't Buy Fannie Bonds
06 March 2009Russia banned on Thursday investment of its $220 billion oil wealth funds in bonds of quasi-sovereign agencies such as Fannie Mae and Freddie Mac, citing needs of its own budget and pension system.
Russia had about $100 billion of its foreign currency reserves invested in U.S. government agencies at the start of 2008 as it sought to broaden its portfolio and chased higher yields.
It has now cut its holdings to zero as its reserves fell by a third to $384 billion on the back of capital outflows and ruble support and as authorities sought to invest the remaining wealth into less riskier assets.
The Finance Ministry said it needed to shift the portfolios in favor of more liquid assets, such as sovereign bonds, as Russia plans to tap the funds to cover budget and pension fund deficits this year.
"The funds will be used for their direct purpose," said Pyotr Kazakevich, head of the ministry's state debt department.
The Finance Ministry holds the funds in foreign currency accounts at the Central Bank, which manages them as part of its forex reserves and pays back returns in line with performance of an index, designed by the ministry's portfolio managers.
The announced changes will affect the composition of the ministry's index, and experts say the Central Bank's foreign currency reserves' portfolio, which is not publicly disclosed, is close to the ministry's index.
But much of the retreat from the quasi-sovereign assets has already occurred.
"This is a case of the practice that has been established being enshrined into law," said Maxim Oreshkin, head of research at Rosbank.
"Last year, when Fannie Mae and Freddie Mac were having problems, the Central Bank, which invests the fund, sharply pared back its investments," Oreshkin said. "It had invested in short-term paper that was gradually redeemed, and it didn't make new investments," he said.
Russia will this year run its first budget deficit in a decade, and the deficit is expected to hit 8 percent of the gross domestic product provided that the price of oil, Russia's main export commodity, averages $41 per barrel.
Russia plans to tap the $136.3 billion Reserve Fund for 2.7 trillion rubles ($74.54 billion) to cover the deficit.
The new rules say 95 percent of the fund should be kept in sovereign bonds.
Russia also plans to tap the $83.7 billion National Welfare Fund, initially earmarked for riskier investments, to cover the pension fund deficit and also to support the banking system.
According to the latest U.S. Treasury data Russia in 2008 boosted its holding of U.S. Treasuries to $116.4 billion from $32.7 billion, becoming the seventh-largest holder of Treasuries globally.
Russia had about $100 billion of its foreign currency reserves invested in U.S. government agencies at the start of 2008 as it sought to broaden its portfolio and chased higher yields.
It has now cut its holdings to zero as its reserves fell by a third to $384 billion on the back of capital outflows and ruble support and as authorities sought to invest the remaining wealth into less riskier assets.
The Finance Ministry said it needed to shift the portfolios in favor of more liquid assets, such as sovereign bonds, as Russia plans to tap the funds to cover budget and pension fund deficits this year.
"The funds will be used for their direct purpose," said Pyotr Kazakevich, head of the ministry's state debt department.
The Finance Ministry holds the funds in foreign currency accounts at the Central Bank, which manages them as part of its forex reserves and pays back returns in line with performance of an index, designed by the ministry's portfolio managers.
The announced changes will affect the composition of the ministry's index, and experts say the Central Bank's foreign currency reserves' portfolio, which is not publicly disclosed, is close to the ministry's index.
But much of the retreat from the quasi-sovereign assets has already occurred.
"This is a case of the practice that has been established being enshrined into law," said Maxim Oreshkin, head of research at Rosbank.
"Last year, when Fannie Mae and Freddie Mac were having problems, the Central Bank, which invests the fund, sharply pared back its investments," Oreshkin said. "It had invested in short-term paper that was gradually redeemed, and it didn't make new investments," he said.
Russia will this year run its first budget deficit in a decade, and the deficit is expected to hit 8 percent of the gross domestic product provided that the price of oil, Russia's main export commodity, averages $41 per barrel.
Russia plans to tap the $136.3 billion Reserve Fund for 2.7 trillion rubles ($74.54 billion) to cover the deficit.
The new rules say 95 percent of the fund should be kept in sovereign bonds.
Russia also plans to tap the $83.7 billion National Welfare Fund, initially earmarked for riskier investments, to cover the pension fund deficit and also to support the banking system.
According to the latest U.S. Treasury data Russia in 2008 boosted its holding of U.S. Treasuries to $116.4 billion from $32.7 billion, becoming the seventh-largest holder of Treasuries globally.
Saturday, February 14, 2009
Federal obligations exceed world GDP
Does $65.5 trillion
terrify anyone yet?
Posted: February 13, 2009
11:35 pm Eastern
By Jerome R. Corsi
WorldNetDaily
As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.
The total U.S. obligations, including Social Security and Medicare benefits to be paid in the future, effectively have placed the U.S. government in bankruptcy, even before new continuing social welfare obligation embedded in the massive spending plan are taken into account.
The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.
The difference between the $455 billion "official" budget deficit numbers and the $5.1 trillion budget deficit cited by "2008 Financial Report of the United States Government" is that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.
(Story continues below)
But the numbers in the 2008 report are calculated on a GAAP basis ("Generally Accepted Accounting Practices") that include year-for-year changes in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare.
Under cash accounting, the government makes no provision for future Social Security and Medicare benefits in the year in which those benefits accrue.
"As bad as 2008 was, the $455 billion budget deficit on a cash basis and the $5.1 trillion federal budget deficit on a GAAP accounting basis does not reflect any significant money [from] the financial bailout or Troubled Asset Relief Program, or TARP, which was approved after the close of the fiscal year," economist John Williams, who publishes the Internet website Shadow Government Statistics, told WND.
Find out what's behind the chaos at the White House, in the No. 1 best-seller "Obama Nation"
"The Congressional Budget Office estimated the fiscal year 2009 budget deficit as being $1.2 trillion on a cash basis and that was before taking into consideration the full costs of the war in Iraq and Afghanistan, before the cost of the Obama nearly $800 billion economic stimulus plan, or the cost of the second $350 billion in TARP funds, as well as all current bailouts being contemplated by the U.S. Treasury and Federal Reserve," he said.
"The federal government's deficit is hemorrhaging at a pace which threatens the viability of the financial system," Williams added. "The popularly reported 2009 [deficit] will clearly exceed $2 trillion on a cash basis and that full amount has to be funded by Treasury borrowing.
"It's not likely this will happen without the Federal Reserve acting as lender of last resort for the Treasury by buying Treasury debt and monetizing the debt," he said.
"Monetizing the debt" is a term used to signify that the Federal Reserve will be required simply to print cash to meet the Treasury debt obligations, acting in this capacity only because the Treasury cannot sell the huge of amount debt elsewhere.
The Treasury has been largely dependent upon foreign buyers, principally China and Japan and other major holders of U.S. dollar foreign exchange reserves, including OPEC buyers purchasing U.S. debt through London.
"The appetite of foreign buyers to purchase continued trillions of U.S. debt has become more questionable as the world has witnessed the rapid deterioration of the U.S. fiscal condition in the current financial crisis," Williams noted.
"Truthfully," Williams pointed out, "there is no Social Security 'lock-box.' There are no funds held in reserve today for Social Security and Medicare obligations that are earned each year. It's only a matter of time until the public realizes that the government is truly bankrupt and no taxes are being held in reserve to pay in the future the Social Security and Medicare benefits taxpayers are earning today."
Calculations from the "2008 Financial Report of the United States Government" also show that the GAAP negative net worth of the federal government has increased to $59.3 trillion while the total federal obligations under GAAP accounting now total $65.5 trillion.
The $65.5 trillion total federal obligations under GAAP accounting not only now exceed four times the U.S. gross domestic product, or GDP, the $65.5 trillion deficit exceeds total world GDP.
"In the seven years of GAAP reporting, we have seen an annual average deficit in excess of $4 trillion, which could not be possibly covered by any form of taxation," Williams argued.
"Shy of the government severely slashing social welfare programs, federal deficits of this magnitude are beyond any hope of containment, government or otherwise," he said.
"Put simply, there is no way the government can possibly pay for the level of social welfare benefits the federal government has promised unless the government simply prints cash and debases the currency, which the government will increasingly be doing this year," Williams said, explaining in more detail why he feels the government is now in the process of monetizing the federal debt.
"Social Security and Medicare must be shown as liabilities on the federal balance sheet in the year they accrue according to GAAP accounting," Williams argues. "To do otherwise is irresponsible, nothing more than an attempt to hide the painful truth from the American public. The public has a right to know just how bad off the federal government budget deficit situation really is, especially since the situation is rapidly spinning out of control.
"The federal government is bankrupt," Williams told WND. "In a post-Enron world, if the federal government were a corporation such as General Motors, the president and senior Treasury officers would be in federal penitentiary."
terrify anyone yet?
Posted: February 13, 2009
11:35 pm Eastern
By Jerome R. Corsi
WorldNetDaily
As the Obama administration pushes through Congress its $800 billion deficit-spending economic stimulus plan, the American public is largely unaware that the true deficit of the federal government already is measured in trillions of dollars, and in fact its $65.5 trillion in total obligations exceeds the gross domestic product of the world.
The total U.S. obligations, including Social Security and Medicare benefits to be paid in the future, effectively have placed the U.S. government in bankruptcy, even before new continuing social welfare obligation embedded in the massive spending plan are taken into account.
The real 2008 federal budget deficit was $5.1 trillion, not the $455 billion previously reported by the Congressional Budget Office, according to the "2008 Financial Report of the United States Government" as released by the U.S. Department of Treasury.
The difference between the $455 billion "official" budget deficit numbers and the $5.1 trillion budget deficit cited by "2008 Financial Report of the United States Government" is that the official budget deficit is calculated on a cash basis, where all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.
(Story continues below)
But the numbers in the 2008 report are calculated on a GAAP basis ("Generally Accepted Accounting Practices") that include year-for-year changes in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare.
Under cash accounting, the government makes no provision for future Social Security and Medicare benefits in the year in which those benefits accrue.
"As bad as 2008 was, the $455 billion budget deficit on a cash basis and the $5.1 trillion federal budget deficit on a GAAP accounting basis does not reflect any significant money [from] the financial bailout or Troubled Asset Relief Program, or TARP, which was approved after the close of the fiscal year," economist John Williams, who publishes the Internet website Shadow Government Statistics, told WND.
Find out what's behind the chaos at the White House, in the No. 1 best-seller "Obama Nation"
"The Congressional Budget Office estimated the fiscal year 2009 budget deficit as being $1.2 trillion on a cash basis and that was before taking into consideration the full costs of the war in Iraq and Afghanistan, before the cost of the Obama nearly $800 billion economic stimulus plan, or the cost of the second $350 billion in TARP funds, as well as all current bailouts being contemplated by the U.S. Treasury and Federal Reserve," he said.
"The federal government's deficit is hemorrhaging at a pace which threatens the viability of the financial system," Williams added. "The popularly reported 2009 [deficit] will clearly exceed $2 trillion on a cash basis and that full amount has to be funded by Treasury borrowing.
"It's not likely this will happen without the Federal Reserve acting as lender of last resort for the Treasury by buying Treasury debt and monetizing the debt," he said.
"Monetizing the debt" is a term used to signify that the Federal Reserve will be required simply to print cash to meet the Treasury debt obligations, acting in this capacity only because the Treasury cannot sell the huge of amount debt elsewhere.
The Treasury has been largely dependent upon foreign buyers, principally China and Japan and other major holders of U.S. dollar foreign exchange reserves, including OPEC buyers purchasing U.S. debt through London.
"The appetite of foreign buyers to purchase continued trillions of U.S. debt has become more questionable as the world has witnessed the rapid deterioration of the U.S. fiscal condition in the current financial crisis," Williams noted.
"Truthfully," Williams pointed out, "there is no Social Security 'lock-box.' There are no funds held in reserve today for Social Security and Medicare obligations that are earned each year. It's only a matter of time until the public realizes that the government is truly bankrupt and no taxes are being held in reserve to pay in the future the Social Security and Medicare benefits taxpayers are earning today."
Calculations from the "2008 Financial Report of the United States Government" also show that the GAAP negative net worth of the federal government has increased to $59.3 trillion while the total federal obligations under GAAP accounting now total $65.5 trillion.
The $65.5 trillion total federal obligations under GAAP accounting not only now exceed four times the U.S. gross domestic product, or GDP, the $65.5 trillion deficit exceeds total world GDP.
"In the seven years of GAAP reporting, we have seen an annual average deficit in excess of $4 trillion, which could not be possibly covered by any form of taxation," Williams argued.
"Shy of the government severely slashing social welfare programs, federal deficits of this magnitude are beyond any hope of containment, government or otherwise," he said.
"Put simply, there is no way the government can possibly pay for the level of social welfare benefits the federal government has promised unless the government simply prints cash and debases the currency, which the government will increasingly be doing this year," Williams said, explaining in more detail why he feels the government is now in the process of monetizing the federal debt.
"Social Security and Medicare must be shown as liabilities on the federal balance sheet in the year they accrue according to GAAP accounting," Williams argues. "To do otherwise is irresponsible, nothing more than an attempt to hide the painful truth from the American public. The public has a right to know just how bad off the federal government budget deficit situation really is, especially since the situation is rapidly spinning out of control.
"The federal government is bankrupt," Williams told WND. "In a post-Enron world, if the federal government were a corporation such as General Motors, the president and senior Treasury officers would be in federal penitentiary."
Wednesday, February 11, 2009
Fed Lacks Consensus on Treasuries as Yields Rise (Update1)
By Scott Lanman and Craig Torres
Feb. 9 (Bloomberg) -- Federal Reserve officials have failed to resolve an internal debate over whether to purchase long-term Treasuries, even as rising yields on the securities threaten to undermine the central bank’s objective of cutting borrowing costs for consumers and businesses.
Policy makers are instead focusing on a program to purchase $200 billion in consumer and small-business loans and on a plan to buy $600 billion in home-finance debt, according to people familiar with the deliberations.
Forgoing purchases of Treasuries may exacerbate a jump in borrowing costs for the government as federal debt managers seek to finance an unprecedented budget deficit. Benchmark 10-year note yields this week exceeded their level of Dec. 1, when Fed Chairman Ben S. Bernanke first talked about the option. That’s raised other borrowing costs, potentially delaying a recovery.
“The Fed will get a lot more bang for its buck by buying mortgages than buying Treasuries,” said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed economist. “We were kind of a little surprised when the Fed wanted to go down this route” in comments starting in December, Ryding said.
Fed officials are seeking other ways to use monetary policy to ease credit after cutting the benchmark interest rate almost to zero, completing more than 5 percentage points of reductions since September 2007.
FOMC Meetings
The debate over buying Treasuries has now continued for two meetings of the Federal Open Market Committee. The potential acquisition of government debt to help finance a bank rescue doesn’t appear in the minutes of the December meeting.
The FOMC’s post-meeting statement on Jan. 28 signaled that not all participants are convinced. The panel “is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the statement said.
That’s still a harder line than on Dec. 16, when policy makers said they were “evaluating the potential benefits of purchasing longer-term Treasury securities.” Bernanke said in a Jan. 13 speech that the FOMC will focus on the “potential” of the purchases “to improve conditions in private credit markets, such as mortgage markets.”
Fed Split
Richmond Fed President Jeffrey Lacker dissented from the Jan. 28 decision, highlighting a split between the Board of Governors and some Fed presidents on how to stem the credit crisis and revive economic growth. Lacker preferred to expand the money supply “by purchasing U.S. Treasury securities rather than through targeted credit programs,” the FOMC statement said.
Buying Treasuries would reduce yields on government debt, prompting a decline in rates on mortgages, corporate bonds and other types of borrowing, according to Lacker and some other policy makers.
Still, there’s no guarantee the purchases would work, given that cuts in the Fed’s main interest rate failed to pare costs for corporations and other borrowers. Also, money created by the central bank to buy the Treasuries may fuel inflation should the Fed fail to quickly unwind the purchases as the economy begins to rebound.
‘Higher’ Bar
“The bar is a lot higher than we thought,” said Brian Sack, vice president at Macroeconomic Advisers LLC, and a former section chief at the Fed Board. “The statement said they are going to employ all available tools and yet they are reluctant to use the tool that is most readily available.” The FOMC next meets March 17.
Rates on long-term Treasuries have climbed this year as investor hopes faded for a quick start to Fed purchases. The yield on the 30-year government bond was 3.70 percent today, compared with 2.68 percent on Dec. 31. The yield on the 10-year note was little changed at 2.99 percent.
Costs for home loans are also rising. The average U.S. rate on a 30-year fixed mortgage increased to 5.25 percent last week from 5.10 percent the previous week, housing-finance provider Freddie Mac said on Feb. 5. In the week ended Jan. 23, mortgage applications in the U.S. slumped by the most in 16 years as refinancing plunged.
Fed purchases of Treasuries would sustain demand amid speculation China and other nations may curtail their holdings in U.S. debt, said Bill Gross, co-chief investment officer of Pacific Investment Management Co., the world’s biggest bond-fund manager.
China Investment
China is the largest investor in U.S. government securities, holding $681.9 billion of Treasuries.
“To the extent that the Chinese and others do not have the necessary funds, someone has to buy them,” Gross said in an interview with Bloomberg Television. “It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets.”
Investors were disappointed when the Fed didn’t announce plans to buy long-term Treasuries in its Jan. 28 statement. The yield on 30-year Treasury securities rose 17 basis points to 3.41 percent that day. A basis point is 0.01 percentage point.
“What are they waiting for?” said Mark Spindel, who invests about $100 million as chief investment officer at Potomac River Capital in Washington. “I don’t understand this resistance from the Fed. Mortgage rates are now beginning to rise.”
Corporate Borrowing
One index shows the premium for corporate borrowing costs over 10-year Treasuries. While the spread has narrowed to 5.19 percentage points since reaching a high of 6.22 points on Dec. 16, it’s still more than triple the average spread of 1.66 percentage points in the year before the credit crisis started in August 2007.
As of Feb. 4, the Fed had bought $7.38 billion of mortgage- backed securities, out of $500 billion authorized, and $29.9 billion of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks, out of a possible $100 billion.
The Fed plans this month to announce a start date for the Term Asset-Backed Securities Lending Facility, or TALF, to prop up the market for student and auto loans, credit-card debt and small-business lending.
The Fed will release minutes of the Jan. 27-28 FOMC meeting on Feb. 18. Bernanke will testify before Congress on Feb. 10, give a speech on Feb. 18 and provide semiannual testimony on monetary policy to the Senate and House starting Feb. 24.
Feb. 9 (Bloomberg) -- Federal Reserve officials have failed to resolve an internal debate over whether to purchase long-term Treasuries, even as rising yields on the securities threaten to undermine the central bank’s objective of cutting borrowing costs for consumers and businesses.
Policy makers are instead focusing on a program to purchase $200 billion in consumer and small-business loans and on a plan to buy $600 billion in home-finance debt, according to people familiar with the deliberations.
Forgoing purchases of Treasuries may exacerbate a jump in borrowing costs for the government as federal debt managers seek to finance an unprecedented budget deficit. Benchmark 10-year note yields this week exceeded their level of Dec. 1, when Fed Chairman Ben S. Bernanke first talked about the option. That’s raised other borrowing costs, potentially delaying a recovery.
“The Fed will get a lot more bang for its buck by buying mortgages than buying Treasuries,” said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed economist. “We were kind of a little surprised when the Fed wanted to go down this route” in comments starting in December, Ryding said.
Fed officials are seeking other ways to use monetary policy to ease credit after cutting the benchmark interest rate almost to zero, completing more than 5 percentage points of reductions since September 2007.
FOMC Meetings
The debate over buying Treasuries has now continued for two meetings of the Federal Open Market Committee. The potential acquisition of government debt to help finance a bank rescue doesn’t appear in the minutes of the December meeting.
The FOMC’s post-meeting statement on Jan. 28 signaled that not all participants are convinced. The panel “is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the statement said.
That’s still a harder line than on Dec. 16, when policy makers said they were “evaluating the potential benefits of purchasing longer-term Treasury securities.” Bernanke said in a Jan. 13 speech that the FOMC will focus on the “potential” of the purchases “to improve conditions in private credit markets, such as mortgage markets.”
Fed Split
Richmond Fed President Jeffrey Lacker dissented from the Jan. 28 decision, highlighting a split between the Board of Governors and some Fed presidents on how to stem the credit crisis and revive economic growth. Lacker preferred to expand the money supply “by purchasing U.S. Treasury securities rather than through targeted credit programs,” the FOMC statement said.
Buying Treasuries would reduce yields on government debt, prompting a decline in rates on mortgages, corporate bonds and other types of borrowing, according to Lacker and some other policy makers.
Still, there’s no guarantee the purchases would work, given that cuts in the Fed’s main interest rate failed to pare costs for corporations and other borrowers. Also, money created by the central bank to buy the Treasuries may fuel inflation should the Fed fail to quickly unwind the purchases as the economy begins to rebound.
‘Higher’ Bar
“The bar is a lot higher than we thought,” said Brian Sack, vice president at Macroeconomic Advisers LLC, and a former section chief at the Fed Board. “The statement said they are going to employ all available tools and yet they are reluctant to use the tool that is most readily available.” The FOMC next meets March 17.
Rates on long-term Treasuries have climbed this year as investor hopes faded for a quick start to Fed purchases. The yield on the 30-year government bond was 3.70 percent today, compared with 2.68 percent on Dec. 31. The yield on the 10-year note was little changed at 2.99 percent.
Costs for home loans are also rising. The average U.S. rate on a 30-year fixed mortgage increased to 5.25 percent last week from 5.10 percent the previous week, housing-finance provider Freddie Mac said on Feb. 5. In the week ended Jan. 23, mortgage applications in the U.S. slumped by the most in 16 years as refinancing plunged.
Fed purchases of Treasuries would sustain demand amid speculation China and other nations may curtail their holdings in U.S. debt, said Bill Gross, co-chief investment officer of Pacific Investment Management Co., the world’s biggest bond-fund manager.
China Investment
China is the largest investor in U.S. government securities, holding $681.9 billion of Treasuries.
“To the extent that the Chinese and others do not have the necessary funds, someone has to buy them,” Gross said in an interview with Bloomberg Television. “It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets.”
Investors were disappointed when the Fed didn’t announce plans to buy long-term Treasuries in its Jan. 28 statement. The yield on 30-year Treasury securities rose 17 basis points to 3.41 percent that day. A basis point is 0.01 percentage point.
“What are they waiting for?” said Mark Spindel, who invests about $100 million as chief investment officer at Potomac River Capital in Washington. “I don’t understand this resistance from the Fed. Mortgage rates are now beginning to rise.”
Corporate Borrowing
One index shows the premium for corporate borrowing costs over 10-year Treasuries. While the spread has narrowed to 5.19 percentage points since reaching a high of 6.22 points on Dec. 16, it’s still more than triple the average spread of 1.66 percentage points in the year before the credit crisis started in August 2007.
As of Feb. 4, the Fed had bought $7.38 billion of mortgage- backed securities, out of $500 billion authorized, and $29.9 billion of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks, out of a possible $100 billion.
The Fed plans this month to announce a start date for the Term Asset-Backed Securities Lending Facility, or TALF, to prop up the market for student and auto loans, credit-card debt and small-business lending.
The Fed will release minutes of the Jan. 27-28 FOMC meeting on Feb. 18. Bernanke will testify before Congress on Feb. 10, give a speech on Feb. 18 and provide semiannual testimony on monetary policy to the Senate and House starting Feb. 24.
Barneys Buyers Said to Offer Half '07 Price as Dubai Seeks Cash
By Jonathan Keehner, Sara Gay Forden and Haris Anwar
Feb. 11 (Bloomberg) -- Barneys New York’s owner, Dubai’s Istithmar World PJSC, may sell the luxury retailer for less than half what it paid two years ago as the state-owned fund seeks to raise cash to meet debt payments.
Barneys, which Istithmar bought for $942.3 million in 2007, may fetch $350 million to $600 million, according to four people familiar with potential bids. Even in that price range, a surge in retail bankruptcies, falling luxury sales and frozen credit markets are muting interest, the people said, declining to be identified because the talks are private.
“It’s a buyers’ market,” said John Guy, a fashion and luxury analyst with MF Global Securities in London. “The fact that luxury-goods stocks have fallen more than 30 percent in the past year is also going to weigh on expectations.”
Dubai and its state entities borrowed $80 billion to finance the emirate’s transformation into the Persian Gulf’s banking and tourism hub. It’s now being stung by a drop in both real-estate values and the price of oil, which fuelled the region’s growth.
The government’s Dubai World owns both Istithmar and real- estate developer Nakheel PJSC, which needs cash for debt maturing this year, according to a person familiar with Dubai World. Nakheel sold $3.52 billion of Islamic bonds in December 2006 that mature in 2009, Bloomberg data show.
Istithmar, which managed more than $10 billion as of last year, also owns 20 percent of Canadian circus troupe Cirque du Soleil and a majority of Gulf Stream Asset Management LLC.
Expansion Stymied
Barneys, an 86-year-old retailer that sells fashions by designers from Balenciaga to Manolo Blahnik, was stymied in its international expansion as credit markets evaporated and luxury consumers retrenched. It operates 13 outlets and 18 lower-priced CO-OP stores as well as nine Barneys department stores in cities including New York, Beverly Hills, Seattle and Chicago.
Istithmar World’s Dubai-based media consultant, Nicholas Nesson, said the fund has no comment. Reuters reported Feb. 8 that Dubai World Chairman Sultan Ahmed bin Sulayem said the fund hasn’t sought buyers for Barneys.
Sulayem didn’t answer his mobile phone when called for comment yesterday. Sana Maadad, a Dubai-based spokeswoman for the company, said Sulayem wouldn’t comment further.
The yield on the three-year Islamic bond issued by Nakheel Development Ltd. soared to 41.85 percent this month on concern the developer’s finances were getting squeezed.
Property, Luxury Slump
Residential property prices increased fourfold in the last five years in Dubai, helped by the global credit boom and new laws allowing foreigners to own property. The credit crunch has since cut off its state entities from borrowing. Dubai, the second-largest of the United Arab Emirates, started work on the world’s tallest building and created islands shaped like palm trees during its boom this decade.
Any buyer of Barneys faces a crisis that luxury-goods billionaire Bernard Arnault calls the worst since the 1930s. In 2009, luxury sales may fall for the first time in a decade, consulting firm Bain & Co. estimates.
Founded by Barney Pressman to sell cut-rate men’s suits in 1923, Barneys began building women’s lines in the 1970s with the help of his grandsons, Gene and Robert Pressman. “We went to Paris and Milan and started buying designers like Armani, Alaia, Versace and Prada,” Gene Pressman, 58 said in Feb. 6 interview. “We carried a jeans and designer mix that was unique.”
The Pressman family lost control in 1998 and the company exited bankruptcy protection in 1999. It was bought by Jones Apparel Group Inc. for $294.3 million in 2004. Istithmar acquired Barneys from Jones in September 2007.
Istithmar has been working with New York executive-search firm Herbert Mines Associates in New York to find a replacement for Howard Socol, 63, who resigned as Barneys’ CEO in May.
Socol, a former chairman of J Crew Group Inc., had been with Barneys since 2001. He oversaw expansion into flagship stores and CO-OPs nationwide, and sought brands that would distinguish Barneys from competitors Saks Fifth Avenue and Neiman Marcus Group Inc. Herbert Mines Chairman Hal Reiter declined to comment on the search.
Feb. 11 (Bloomberg) -- Barneys New York’s owner, Dubai’s Istithmar World PJSC, may sell the luxury retailer for less than half what it paid two years ago as the state-owned fund seeks to raise cash to meet debt payments.
Barneys, which Istithmar bought for $942.3 million in 2007, may fetch $350 million to $600 million, according to four people familiar with potential bids. Even in that price range, a surge in retail bankruptcies, falling luxury sales and frozen credit markets are muting interest, the people said, declining to be identified because the talks are private.
“It’s a buyers’ market,” said John Guy, a fashion and luxury analyst with MF Global Securities in London. “The fact that luxury-goods stocks have fallen more than 30 percent in the past year is also going to weigh on expectations.”
Dubai and its state entities borrowed $80 billion to finance the emirate’s transformation into the Persian Gulf’s banking and tourism hub. It’s now being stung by a drop in both real-estate values and the price of oil, which fuelled the region’s growth.
The government’s Dubai World owns both Istithmar and real- estate developer Nakheel PJSC, which needs cash for debt maturing this year, according to a person familiar with Dubai World. Nakheel sold $3.52 billion of Islamic bonds in December 2006 that mature in 2009, Bloomberg data show.
Istithmar, which managed more than $10 billion as of last year, also owns 20 percent of Canadian circus troupe Cirque du Soleil and a majority of Gulf Stream Asset Management LLC.
Expansion Stymied
Barneys, an 86-year-old retailer that sells fashions by designers from Balenciaga to Manolo Blahnik, was stymied in its international expansion as credit markets evaporated and luxury consumers retrenched. It operates 13 outlets and 18 lower-priced CO-OP stores as well as nine Barneys department stores in cities including New York, Beverly Hills, Seattle and Chicago.
Istithmar World’s Dubai-based media consultant, Nicholas Nesson, said the fund has no comment. Reuters reported Feb. 8 that Dubai World Chairman Sultan Ahmed bin Sulayem said the fund hasn’t sought buyers for Barneys.
Sulayem didn’t answer his mobile phone when called for comment yesterday. Sana Maadad, a Dubai-based spokeswoman for the company, said Sulayem wouldn’t comment further.
The yield on the three-year Islamic bond issued by Nakheel Development Ltd. soared to 41.85 percent this month on concern the developer’s finances were getting squeezed.
Property, Luxury Slump
Residential property prices increased fourfold in the last five years in Dubai, helped by the global credit boom and new laws allowing foreigners to own property. The credit crunch has since cut off its state entities from borrowing. Dubai, the second-largest of the United Arab Emirates, started work on the world’s tallest building and created islands shaped like palm trees during its boom this decade.
Any buyer of Barneys faces a crisis that luxury-goods billionaire Bernard Arnault calls the worst since the 1930s. In 2009, luxury sales may fall for the first time in a decade, consulting firm Bain & Co. estimates.
Founded by Barney Pressman to sell cut-rate men’s suits in 1923, Barneys began building women’s lines in the 1970s with the help of his grandsons, Gene and Robert Pressman. “We went to Paris and Milan and started buying designers like Armani, Alaia, Versace and Prada,” Gene Pressman, 58 said in Feb. 6 interview. “We carried a jeans and designer mix that was unique.”
The Pressman family lost control in 1998 and the company exited bankruptcy protection in 1999. It was bought by Jones Apparel Group Inc. for $294.3 million in 2004. Istithmar acquired Barneys from Jones in September 2007.
Istithmar has been working with New York executive-search firm Herbert Mines Associates in New York to find a replacement for Howard Socol, 63, who resigned as Barneys’ CEO in May.
Socol, a former chairman of J Crew Group Inc., had been with Barneys since 2001. He oversaw expansion into flagship stores and CO-OPs nationwide, and sought brands that would distinguish Barneys from competitors Saks Fifth Avenue and Neiman Marcus Group Inc. Herbert Mines Chairman Hal Reiter declined to comment on the search.
Monday, February 09, 2009
Taxes and Treasuries
How are we going to replace the taxes lost by the big drop in gas prices? We have lost around 75% of the tax income that was being generated by federal, state and local taxes imposed on fuel. Are we going to see a new tax soon? Maybe a carbon tax or maybe a federal sales tax. Our government (I say our) the government must increase taxes somewhere to charge us with the bill for TARP and the new stimulus coming. That money is not free; the federal government does not have products to sell so it MUST pass the bill on to you and me. Where are you going to get the money to pay your share. The new stimulus will cost us enough to pay off 90% of our mortgages. Yet you will not get that much but you will have to pay it back.
OPEC- can no longer afford to buy our debt through treasury note purchases and other debt based government securities. Most of the construction in Dubai has stopped as well. Now the federal reserve which is a privately held banking cartel of sorts has announced that it may start buying Treasury Notes. That is funny to me; as they created, out of thin air mind you, the money that is loaned out that the T-notes are backing. If it seems like a vicious circle; it is, and it will come crashing down on us in the form of devalued currency and probably taxes.
Dose this bother you?
OPEC- can no longer afford to buy our debt through treasury note purchases and other debt based government securities. Most of the construction in Dubai has stopped as well. Now the federal reserve which is a privately held banking cartel of sorts has announced that it may start buying Treasury Notes. That is funny to me; as they created, out of thin air mind you, the money that is loaned out that the T-notes are backing. If it seems like a vicious circle; it is, and it will come crashing down on us in the form of devalued currency and probably taxes.
Dose this bother you?
Fed Set To Buy Treasuries
The Federal Reserve has officially added another weapon to its "economy-reviving" arsenal — buying long-term Treasuries to ease the flow of credit.
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