Friday, May 1, 2009

Breaking 3%

On March 18, 2009 the Federal Reserve announced plans to purchase $300 billion of long-term government bonds in an effort to lower rates on mortgages and other debt instruments. The ten year Treasury was trading at 3.01%, which seemed to mark the point of defense for the Fed. Yields on the ten year quickly fell to 2.5% after the big announcement (as marked by the red arrow in the chart below), and Fannie Mae mortgage commitment rates dropped to 4.25%.

But on Wednesday, following the Fed’s latest meeting, there was no announcement on future purchases – and the Treasury market did not like that news. Yields broke above the key 3% level and now stand at 3.12% and are rising. Are supply issues due to future funding of the fiscal deficit weighing on investors’ minds? Are deflationary forces subsiding, reinforced by a strong reading of the GDP Price Index? I feel there are many different contributing factors to this rise, but one thing seems certain – the Fed will have to really ramp up their efforts if they wish to keep interest rates from rising any higher.