Chillin' out till it needs to be funded
In what must gladden our and even Paul Krugman’s hearts, just two weeks ago a paper from our PM namesake and IMF Economist Manmohan Singh appeared to taser thru fixed income traders’ consciousness on the unlikely subject of Floating rate note treasuries. The speculation indicates a possible solution for the near zero interest rates market with most Central banks realising the end of collateral is near and that simply put there is not going to be enouch collateral paper to go around to issue more central debt to banks or otherwise keep the fight for the recovery alive.
While Ben had earlier nodded heartily to the need for a healthy inflation and emboldened us to speak for the subject as a opinion maker / influencer, most had ( including Paul Krugman) given up on the Fed doing anything about it, happy as it was with the ruling inflation rates and the survival of the all time low Fed discount rate of 0-0.25% range, barely able to stave off discussions of QE3 till he succeeded at last week’s FOMC to obviate most discussions harping on the need for further monetisation from the Fed.
Now, what has been deciphered by folks at zerohedge and is yet safe with ZH and their large followers, is the analysis we are going to take a fancy to in the next few and at the end we can only hope we can conclude in favor of the supposition put forth by the men so bravely while we were away. Of course, that only means that a much larger number of people would now be looking at the IMF paper, but the choice provided is phenomenal as you can read in the extract provided alongside which highlights how challenged by a lower money multiplier in both US and post LTRO Europe, which is the basic result of the “flight to safety” since 2008 whence central banks have been taking unnecessary risks to spice up the demand for non safe collateral like MBS one could easily use an option with the Fed to use the coming Floating Rate note Treasuries to issue new debt at much higher rates without hurting existing shadow finance and bank investors who are already paying negative yields to Depositors.
However, the biggest risk remains that while the strategy could very well be the Fed’s out the Fed and possibly Ben Bernanke is likely to be misunderstood on the same as equities indeed implode from the coming squeeze on liquidity. But afterall, higher interest rates will give head room to fed strategists to determine stricter control on money and like Floaters are effective in handling faster ramp down s of interest rates, they are likely to be effective in running up rates and the demand for the dollar could rise uncontrollably giving impetus to a faster winding down of interest in Gold Silver and Oil and the real demand led commodities may indeed differentiate their trend for the right reasons from here while Apple and a few other stars may well differentiate equities and individual Financials , not just non bank shadow finance players, rise out of relative obscurity
Here’s the currency economist’s read of the FRN launch: http://www.zerohedge.com/news/previewing-tomorrows-floating-rate-treasury-launch-announcement