The Treasury’s Struggle

The question is, can the Federal Reserve Board keep rates on Treasurys down? The Fed has been buying U.S. Treasury notes in the past several weeks in order to keep a lid on long-term Treasurys, particularly the benchmark U.S. 10-year note. Bond prices and yields move in opposite directions. So more demand for bonds should drive rates down. A day before the Fed said on March 18 that it would begin buying Treasurys, the yield on the 10-year was about 3.0%. Following the announcement, bonds rose and the yield fell to about 2.5% - exactly what the Fed wanted. The Fed’s success was temporary, though. Even though the Fed reiterated it would finish purchasing $300 billion in Treasurys by this autumn, the 10-year sell-off continued until the yields crossed over the 3.0% mark. .
"The bond market has sold off because the Fed isn’t changing the amount of bonds they are going to buy," said Brian Battle, vice president of Performance Trust Capital Partners. a fixed-income trading firm in Chicago. As we have indicated since the beginning of the year, there will be an on-going battle that will cause rates to fluctuate significantly. The slow economy and government support both will serve to keep rates down. On the other hand, the government spending to spur the economy will cause rates to increase. Every evidence that the economy is recovering will tilt the balance in favor of higher rates. Thus far, rates on home loans have been able to withstand this pressure because the government has also purchased mortgages, narrowing the spread between mortgages and Treasurys. However, this spread is approaching what it was before the financial crisis hit and any movement of the 10-year higher than 3.25% will likely also cause a corresponding rise in the cost in home loans. Stay tuned as the "tug of war" continues…