gold, page-42234

Many thanks for your detail response. ALways a good learning experience reading your post although sometimes the contents flies above my head.

"First, to my understanding the FED is not selling bonds in the market directly, but asking for Treasury to redeem the ones in the Fed's portfolio that are maturing. Since Treasury does not have the money it must be borrowing such money through the issuance of new bonds. I believe that this is more profitable for the FED than the alternative of selling bonds directly into the bond market at a discount."
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This is interesting as I never know what happens upon maturity of a bond. My logic tells me they simply roll over to another same dated bond and will never pay the holder back the principal. In other words the 'debt' is perpetual. So the "selling" of Feds bond holding this way avoids capital loss of that asset class under their books.


"Whatever the way, the overall stock of bonds is suppose to stay the same while money is being pumped out of circulation."
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If the size of the bond market stays the same and Treasury has a yearly larger expenses as we see with those debt ceiling negotiations, who is supplying that extra expensenses the Treasury is requiring to run Govt and the economic whims of POTUS?

I think I grasp the yield curve as forward indicator of a growing or contracting economic expansion.



"Second, who told you that the yield was kept artificially low for 10 years? If that was the case then we should be swimming by now in a sea of inflation."
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It is my understanding that QE1-3 & Operation Twist were mechanics designed to keep the bond yield low. Treasury issue bonds (I am not sure if roll over or new ones) and Feds kept buying up to $85B monthly to push down yield so this to me is artificial. It is debatable if this is money printing. The QE was not meant to let the banks pass the cheap money as loans to the 'man on the street'. IT was designed to have a low yield, lent to the problem banks so they buy time to rectify their balance sheets. I am assuming these problem banks use that loan (liquidity) then parks it back with the Feds and make a "free" low yield rate at the time 0.25%. This suppress the inflation helping the economy at large to recover and preserving those toxic MBS assets on the problem bank's BS to recover before it is deem an asset again. Not sure the relationship between these banks and TARP though.

SO that is why the inflation remains subdues on the headline number over the years. Whether the style of Feds formula of inflation calculation matches the consensus method of calculation is not something I fully understand so I won't go there.

This low yield bond environment = low IR environment meant that these investors with money (usually reserved to the rich) had to find ways to get a decent return compared to Fix deposit rates. The most obvious and and shortest possible route is the stock market (highest risk) although CDO punting in the past suggest buying a house is of higher risk!

As the stock market came back into vogue, momentum attracts momentum along the journey. Some say this is a bubble fueled by stock buybacks but I am thinking this is a convenient excuse because if these large companies are not making fat margins or increase revenue year after year, stock buybacks will have been unsustainable with a high payout ratio, usually a signal of financial engineering geared to a big fall! I think the length of the rally, 10 years from GFC low, is saying the economy is not as bad as what people say. It is virtually impossible to engineer a decade long rally!

What I believe is irrelevant. Unless you say that the bond market is not expanding issuance of new bonds but simply rolling over existing then it isn't as bad as I think about the potential bond collapse that has been anticipated for a long time!