With the US economy struggling, Fed policy-makers are expected this week to announce a new bond-buying plan specifically aimed at pulling long-term interest rates lower.
That could help some Americans buy homes or refinance mortgages. But Wall Street doesn’t see much hope that the Fed can give a significant boost to the economy.
“Interest rates already are low, and it hasn’t had any stimulative effect” on most consumers or businesses, said Dan Greenhaus, chief global strategist at brokerage BTIG in New York.
Still, many bond investors believe that the Fed has little choice but to provide what aid it can to the economy, with the Obama administration and Congress battling over fiscal policy. The annualized yield on 30-year Treasury bonds is below 3.3 percent, the lowest since January 2009—the depths of the last recession. The 10-year Treasury note yield, a benchmark for mortgage rates, is near the generational low of 1.92 percent reached on September 9.
Bond rates fall as the prices of the securities rise.
Treasury yields plummeted for much of August amid a wild rush of buying, as Europe’s debt crisis worsened and the US economy showed signs of slowing markedly. Even though credit-rating firm Standard & Poor’s downgraded the US debt rating in early August for the first time in history, Treasuries kept their status as one of the world’s favorite hiding places in times of market turmoil.
As the economic outlook dimmed, Wall Street also began to focus on what else the Fed could do to bolster growth. Fed Chairman Ben S. Bernanke has signaled that the central bank could resurrect a move it undertook in the 1960s known as Operation Twist. The Fed, which owns $1.6 trillion in Treasuries, could shift that portfolio by selling shorter-term debt and using the proceeds to buy longer-term bonds.
The net effect, the Fed hopes, would be to twist the so-called yield curve, meaning the level of longer-term interest rates compared with short-term rates. In theory, by adding to demand for longer-term Treasury bonds, the Fed could pull those rates down further. That could translate into lower rates on corporate, municipal and mortgage bonds.
Investment bank Credit Suisse expects the Fed to commit to a six-month program of buying $60 billion a month of Treasury debt maturing in seven and 10 years, said Scott Sherman, a Treasury debt strategist at the firm in New York. The Fed would sell bonds maturing in one to three years to finance its purchases of longer-term securities, he said.
Even though the Fed would be selling shorter-term debt in the marketplace, any upward pressure on short-term Treasury interest rates could be limited because the Fed in August said it was likely to keep its benchmark rate near zero through at least mid-2013. If the Fed commits to a new Operation Twist, it would be the third bond-buying program it has launched since November 2008. The last one was a $600-billion purchase program completed in June.
The difference this time is that most analysts believe that the Fed won’t print new money to fund its purchases. If the central bank merely swaps shorter-term Treasuries for longer-term securities, the net amount of its holdings won’t change.
Bernanke thereby might avoid criticism from Republican leaders, including Texas Gov. Rick Perry, who have said the Fed’s efforts to pump more money into the economy could eventually stoke inflation.
“There are certainly political constraints on what the Fed can do now,” BTIG’s Greenhaus said.
(Los Angeles Times)
