Monday, February 25, 2008

A Little Here, A Little There

If you're like me, you don't spend much time looking at the nuances of the spread between the yield on two year bonds vs. ten year. But some people do, and for very good reason. Lately, the "curve" on yield has been steepening.

So, why do I care? Because it's yet another example of how the government commits corporate welfare:

Folks should understand that a steepened yield curve typically does not happen by accident.

Given our current financial climate, this might be seen as a clearly orchestrated move on the part of monetary authorities to allow banks to fatten their profits [by raising - borrowing - short term funds to lend longer term ‘risk free’ to the government] at public expense to help the banks repair their battered balance sheets.

There are some market observers who would describe this change of slope in the interest rate curve as the ‘socialization’ of bank losses.
Let me put this is laymen terms. The Fed makes money available to the big money boys (not you and me) at an increasing lower interest rate (short term rates). Those corporations financial institutions then use that cash to buy longer maturity government bonds that will give them a higher return on their investment than the cost of borrowing, and all done with a risk free bond! Pretty good deal. If you're a private corporation financial institution that is.

I wonder what would happen if I went to the Fed and asked for $100K at prime (with collateral of course) and then purchased a ten year bond, making a totally risk free 1%? It would probably close down the Fed from everyone laughing so hard.

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