Fed to start buying T-bonds today, hoping to move rates
Mortgage refi hopefuls, cross your fingers.
The Federal Reserve will try to get long-term interest rates moving down again when the central bank today launches its first purchases of Treasury bonds.
The Fed triggered a stunning drop in Treasury bond yields on March 18 when policymakers surprised Wall Street by announcing a plan to buy up to $300 billion of Treasuries over the next six months.
The yield on the 10-year T-note plunged to 2.53% on March 18 from 3% the previous day, the biggest one-day drop in decades.
But since then, Treasury bond yields have been creeping higher. The 10-year T-note ended Tuesday at 2.65%. Conventional mortgage rates have flattened or inched up in recent days, although they remain historically low, in the range of 4.75% to 5%.
The Fed jolted the market again on Tuesday when it announced that its purchases of Treasuries would begin today. Bond yields had been modestly higher for much of the session, then pulled back after the Fed’s announcement.
If the Fed wants to help the housing market with lower or stable mortgage rates, it may at least have to keep a lid on Treasury yields, which serve as benchmarks for other long-term interest rates.
The Fed’s effort to drive down mortgage rates also includes a commitment to buy up to $1.25 trillion of government agency mortgage-backed bonds, an increase from the $500 billion commitment the Fed made late last year.
Although the central bank will be spending a huge sum on Treasuries and mortgage bonds, it’s facing an enormous wave of new supply of Treasuries as government borrowing reaches record levels.
On Tuesday the Treasury sold $40 billion of new two-year T-notes at a yield of 0.95%, which was lower than expected, indicating healthy investor demand. The government will auction $34 billion in five-year notes today and $24 billion in seven-year notes on Thursday.
Against numbers like those in just one week, the Fed’s commitment to buy $300 billion of Treasuries over six months doesn’t look like much. But the Fed has the element of surprise on its side: Traders may be reluctant to get aggressive betting on higher yields (by "shorting" bonds) for fear that the central bank could be even more aggressive in trying to push yields down.
After all, there’s nothing to stop the Fed from suddenly announcing that its $300-billion commitment will get substantially bigger: The central bank can, in effect, print as much money as it wants to buy bonds -- at least, until the day that global investors stop wanting dollars.
-- Tom Petruno