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Strategies & Market Trends : Contrarian Investing
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From: pcyhuang5/1/2008 8:12:39 PM
   of 4080
 
2 Yr. Treasury Yield and Fed Funds Rate



The significance that the yield on 2 year Treasury is above Fed Funds rate is that the banks can now borrow in the Fed Funds market and invest the proceeds profitably in the Treasury market. This implies that the Fed can hold the line and not reduce interest rates any further. This would in turn strengthen the U.S. dollar and lowers the prices of gold and other commodities. All good news for the equity market.

About Fed Funds: " U.S. banks and thrift institutions are obligated by law to maintain certain levels of reserves, either as non-interest-bearing reserves with the Fed or as vault cash. The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank's demand accounts.

For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and reduces the bank's reserves. If its reserve level falls below the legally required minimum, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is the Fed Funds Rate" -- Wikipedia


pcyhuang


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