The article about the Libor scandal, coauthored with Nomi Prins,
received much attention, with Internet repostings, foreign translation,
and video interviews. To further clarify the situation, this article
brings to the forefront implications that might not be obvious to those
without insider experience and knowledge.
The price of Treasury bonds is supported by the Federal Reserve’s large purchases. The Federal Reserve’s purchases are often misread as demand arising from a “flight to quality” due to concern about the EU sovereign debt problem and possible failure of the euro.
Another rationale used to explain the demand for Treasuries despite their negative yield is the “flight to safety.” A 2% yield on a Treasury bond is less of a negative interest rate than the yield of a few basis points on a bank CD, and the US government, unlike banks, can use its central bank to print the money to pay off its debts.
It is possible that some investors purchase Treasuries for these reasons. However, the “safety” and “flight to quality” explanations could not exist if interest rates were rising or were expected to rise. The Federal Reserve prevents the rise in interest rates and decline in bond prices, which normally result from continually issuing new debt in enormous quantities at negative interest rates, by announcing that it has a low interest rate policy and will purchase bonds to keep bond prices high. Without this Fed policy, there could be no flight to safety or quality.
It is the prospect of ever lower interest rates that causes investors to purchase bonds that do not pay a real rate of interest. Bond purchasers make up for the negative interest rate by the rise in price in the bonds caused by the next round of low interest rates. As the Federal Reserve and the banks drive down the interest rate, the issued bonds rise in value, and their purchasers enjoy capital gains.
As the Federal Reserve and the Bank of England are themselves fixing interest rates at historic lows in order to mask the insolvency of their respective banking systems, they naturally do not object that the banks themselves contribute to the success of this policy by fixing the LIbor rate and by selling massive amounts of interest rate swaps, a way of shorting interest rates and driving them down or preventing them from rising.
Read more: http://www.globalresearch.ca/index.php?context=va&aid=31999
The price of Treasury bonds is supported by the Federal Reserve’s large purchases. The Federal Reserve’s purchases are often misread as demand arising from a “flight to quality” due to concern about the EU sovereign debt problem and possible failure of the euro.
Another rationale used to explain the demand for Treasuries despite their negative yield is the “flight to safety.” A 2% yield on a Treasury bond is less of a negative interest rate than the yield of a few basis points on a bank CD, and the US government, unlike banks, can use its central bank to print the money to pay off its debts.
It is possible that some investors purchase Treasuries for these reasons. However, the “safety” and “flight to quality” explanations could not exist if interest rates were rising or were expected to rise. The Federal Reserve prevents the rise in interest rates and decline in bond prices, which normally result from continually issuing new debt in enormous quantities at negative interest rates, by announcing that it has a low interest rate policy and will purchase bonds to keep bond prices high. Without this Fed policy, there could be no flight to safety or quality.
It is the prospect of ever lower interest rates that causes investors to purchase bonds that do not pay a real rate of interest. Bond purchasers make up for the negative interest rate by the rise in price in the bonds caused by the next round of low interest rates. As the Federal Reserve and the banks drive down the interest rate, the issued bonds rise in value, and their purchasers enjoy capital gains.
As the Federal Reserve and the Bank of England are themselves fixing interest rates at historic lows in order to mask the insolvency of their respective banking systems, they naturally do not object that the banks themselves contribute to the success of this policy by fixing the LIbor rate and by selling massive amounts of interest rate swaps, a way of shorting interest rates and driving them down or preventing them from rising.
Read more: http://www.globalresearch.ca/index.php?context=va&aid=31999
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