What Latest Fed Move Means for ETFs


March 18, 2009  by: www.seekingalpha.com

How does the Federal Reserve’s statement today affect Treasury bonds and exchange traded funds (ETFs) that hold the government debt?

The Federal Reserve announced midday that it will begin large-scale purchases of 30-year Treasury Bonds to the tune of $300 billion over the next six months, reports David Goldman for CNN Money. This would help the government accomplish two goals, according to many economists:

  1. Lower interest rates on corporate debt and mortgage loans
  2. Maintain a critical level of support for the bond market to keep values higher

Federal Reserve Chairman Ben Bernanke has made statements that the central bank will use “all the tools” available to revive economic growth, so this move had been expected. Bernanke also left a key short-term bank lending rate at a record low of between zero and 0.25%.

Since interest rates fall as bond prices rise, the money going into 30-year bonds would help push down yields. They’ve been inching up toward 4% after falling to near 2.5% in December. Additionally, by sending prices up, the central bank could help lure more buyers to help prop up a slumping market.

Meanwhile, Bill Gross, manager of Pacific Investment Management Co.’s $138 billion Total Return Fund, upped his holdings of U.S. government debt 15%, the highest percentage since last July 2007, reports Dakin Campbell for Bloomberg.

While the government debt category includes Treasuries, Gross has said in the past that PIMCO is not interested in buying the securities. In February, Gross said it was dependent upon the Federal Reserve to buy Treasuries but that he wouldn’t follow the central bank’s lead.

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