day Octo ber 26 2017 Professor Edwin T Burton Federal Reserve Policy Until 2008 Tighten by selling treasuries open market sales the idea is to raise interest rates Loosen by buying treasuries open market purchases the idea is to lower interest rates ID: 660311
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Slide1
Financial Market Theory
Tues
day, October 26, 2017
Professor Edwin T BurtonSlide2
Federal Reserve Policy
Until 2008Tighten by selling treasuries (open market sales) – the idea is to raise interest ratesLoosen by buying treasuries (open market purchases) – the idea is to lower interest ratesRates targeted:Overnight Repo RateFederal Funds RateAbility to influence longer rates is doubtful – e.g. “operation twist” in the 1960s
After 2008Quantitative easing ballooned the Fed balance sheet and ballooned Member Bank ReservesMakes it very difficult to get “excess reserves” low enough to influence lending ratesIs basically a long term “easing” policyEffect was to have near zero rates for almost a decadeOctober 26, 2017Slide3
The Corporate Bond Market
Before Michael Milken (late 1970s)Limited to very few (less than 50), very high quality creditsWeaker credits had to borrow from banksAfter MilkenThe High Yield (Junk Bond) MarketPioneered by MilkenExclusively operated by Milken until 1987
Now a huge marketGreatly expanded the corporate bond marketOctober 26, 2017Slide4
Other Considerations
The Capital StackThe Debt Stack Vulture (distressed) investingPricing: the yield curve, the “credit spread”
October 26, 2017Slide5