Exchange traded derivatives could mean low Treasury yields for years

June 18, 2012

By Matthew Goldstein and Jennifer Ablan

Fears of rising interest rates  may be overstated, especially if federal regulators push ahead with plans to have a good chunk of derivatives traded through organized clearing houses.

Todd Petzel, chief investment officer for Offit Capital, which manages $6 billion for wealthy investors, argues that the need for traders to post collateral for derivatives contracts traded with clearing houses could provide a new buyer for all the Treasuries the Fed will print to fund the U.S. government deficit and help spur the economy.

In other words, a new source of buyer for Treasuries will emerge.

In a recent letter to Offit’s clients, Petzel says moving derivatives onto clearing house platforms “should reduce systemic risk.” But the move could have the “unintended” effect of creating a new buyer for Treasuries because right now collateral postings in most derivatives trades is irregular and n0t always required at the outset of a transaction.

Petzel says that could all change with clearing of derivatives and that should be good news for the Fed and its inflation hawks.

It is unlikely that this demand will suddenly appear, solving all of the Treasury’s problems at once. But it seems to be a massive wave of buying that will come to market over the next several years and build steadily as the derivatives market grows and more business moves to the clearing model.

But he concludes that will be more bad news for retirees (Petzel says even for some of his family members) seeking yield in money market funds, certificates of deposit and other less risky financial assets.

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