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Why Geithner's sleight of hand may just work

His plans for a public-private investment programme, long in gestation, finally emerged with much hype obscuring a rather elegant simplicity.

Just when government bond investors were growing concerned at fast-deteriorating public finances and huge new supply of bonds to pay for stimulus plans and financial system bailouts, along came a new group of buyers to cap rising yields. Politicians and policymakers know they need to restore confidence to the markets, and central bank quantitative easing, creating money to buy government bonds, certainly looks like a confidence trick.

With 10-year US treasury rates rising 80 basis points from the start of the year, the signs of imminent panic were rising, until the Federal Reserve announced last month that it would buy up to $300 billion of US treasuries of between two- and ten-year maturities over the next six months. That is equivalent to 15% of total outstandings and 30% of forecast new issuance in that period.

Following this announcement rates traders report a stronger tone in the markets, with other buyers looking to extend duration and even go down the credit curve into agencies and government-guaranteed debt.

Can US Treasury secretary Timothy Geithner pull off a similar trick in another distressed and over-supplied asset class: residential mortgages and other toxic real estate loans and bonds?

His plans for a public-private investment programme, long in gestation, finally emerged last month with much hype obscuring a rather elegant simplicity.

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