Bond Outlook November 26th

"TARP" begets "TALF" (Term Asset Loan Facility) as US Government banking support extends beyond mortgage-backed securities to securities backed by credit cards, student loans and car loans. Paulson and company have recognised that, while injecting funds into banks via preference shares is no bad idea, direct price support of troubled assets remains an important element of the rescue plan.

The Treasury itself is not buying the assets, but having the Fed do it. The difference between spending money by the Treasury and the Fed is that:

• Treasury funds have to be generated by taxation or borrowing
• Fed funds can be issued by the Fed itself, a process often called "printing money"

It seems that forex markets are noticing this difference, and the USD's weakening and volatility this week reflects the old wisdom that money printed is money devalued. We confess that the upswing in the USD caught us by surprise, but we maintain that the reason is short-term, reflecting repatriation of foreign funds by US investors needing to plug holes after losses.