The Bernanke Mission: Buy bonds and drive the 30 year yields down to 4.25% and 4.5%. What impact and change will that have on the bigger picture?
Monday, Bernanke said the Fed could directly intervene in markets to stimulate the economy, saying it could purchase U.S. government bonds to drive down yields or private sector debt to narrow spreads and lower borrowing costs.
This "intervention" will obviously come at a cost. As the Fed continues to buy 10 and 30 year bonds, it creates a further erosion of their balance sheets ... balance sheets that were already hurt by buying bad bank obligations.
The impact of that, is that Foreigners consider the U.S.'s credit rating to be falling. No credit rating agency needs to change the rating ... the markets make the judgment on their own and it affects how they allocate their money. For Foreigners, it depreciates the trustworthiness of the Dollar and causes them to redeploy assets away from Dollar related investments. That becomes troublesome for our stock market. As investors become interested in buying, foreigners become less interested and reduce their exposure. If both parties were contradicting each other with a similar amount of money, it would become a zero-sum game for the stock market. For those of you who have heard analyst saying that, "The Fed's actions will turn a credit crisis into a currency crisis", the above explanation gives investors the reason why analyst are starting to worry about our currency.