Yesterday Fed Chairman Bernanke hinted that the Fed may be interested in buying Treasury debt.
Yesterday Fed Chairman Bernanke hinted that the Fed may be interested in buying Treasury debt. This announcement has caused a shift in investor sentiment which has led to an increased demand for risk overnight. Investors seem to be encouraged by the proactive move by the Fed. Other central banks are expected to follow suit.
Overnight the Bank of Japan announced it would accept lower grade bonds as collateral for loans. This proactive move is also being read as a positive for the equity markets. As interest rates in the U.S. and Japan approach zero, both central banks are willing to do whatever it takes to stimulate the credit markets and the economy.
The race is on to see which central bank instills the most confidence in the markets. Traders will be willing to bet on that country’s currency if they can get enough evidence that their central bank’s plans are working to revive the economy and put an end to the recession. So far the money has been flowing into the Yen and the U.S. Dollar. Early last month following an aggressive interest rate cut by the Bank of England, the sentiment shifted to the British Pound. At this time investors seem more committed to the Yen and the Dollar again, but things could change rapidly on December 4 when both the Bank of England and the European Central Bank vote to cut interest rates. Investors will be watching to see which central bank acts more aggressively to cut rates and simultaneously stimulate their economy the most.