Question About Bad Quote from Not-So-Good Article

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Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 547
Question About Bad Quote from Not-So-Good Article

From tonight's NY Times:

"[T}he Fed is expected to discuss unconventional measures to improve financial market operations, having already said it is weighing the benefits of major purchases or [of] long-dated U.S. government securities.

Bond markets had rallied strongly on this news, and investors will be watching closely for hints on the scale of any such purchase program or suggestions that one is imminent, as well as other possible initiatives."

Will someone explain to me why bond markets would rally on news that the Fed is going to monetize the debt?

mred's picture
mred
Status: Bronze Member (Offline)
Joined: Apr 8 2008
Posts: 96
Re: Question About Bad Quote from Not-So-Good Article

Wazzup Lemonyellowschwin,

The game that the bond speculator plays is against the central bank.  Increased demand for bonds means that the bond price goes up, which in turn means that the interest rate goes down. That is the source of profits if you are a bond trader: declining rates. If the speculator knows that the central banker must make massive purchases of bonds, then that pretty much guarantees risk-free profits. Since the intervention of the CB can be anticipated, the speculator can purchase the bonds first and then sell them when the CB carries out the open market operations that increase the bond price. At that point the speculator closes the trade and pockets the profits. 

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 547
Re: Question About Bad Quote from Not-So-Good Article

Thank you mred.  Am I correct, then, in assuming that central bank purchases of government debt mean very different things to a bond trader or speculator on the one hand, and a bond "investor" on the other hand?  How can debt montetization possibly be a good thing for anyone who wants to buy and hold bonds?

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