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What Happens When the Fed Stops Buying Government Debt?

by
January 26, 2010

2010.1.20.FedFinanceTreasury

The Federal Reserve plans to stop buying securities issued by government housing loan agencies Fannie Mae and Freddie Mac by the end of the first quarter. This is not only likely to push up mortgage rates; Treasury rates should rise as well. Throughout 2009, the private sector sold a portion of their agency holdings to the Fed and used those funds to buy Treasurys. Once the Fed’s agency purchases stop, this private sector portfolio shift will end, removing a major source of demand in the Treasury market. As the chart shows, since the start of 2009 the Fed has bought or financed the entire increase in Treasury issuance. As Fed purchases slow and Treasury issuance continues at a high level, interest rates will have to move up to attract new buyers.

FOMC: Statement from December 16, 2009
Gross: Let’s Get Fisical

Post a Comment 1 Comment

  • Posted by jm

    the real question is: what happens when the fed stops charging interest to the US government?

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