UltimateHoboW/Shotgun
09-21-2011, 08:21 PM
The Federal Reserve has announced its latest effort to jolt the economy back to life. In the widely anticipated move, dubbed Operation Twist, it is pledging, over the next nine months, to sell some $400 billion in short-term government bonds it owns and use the proceeds to buy government bonds that mature in 6-30 years. The theory: This market intervention will help further lower long-term interest rates. The Fed also said that when mortgage-backed securities it owns pay off, it will roll the money back into similar securities. That could help push mortgage rates down.
There are some reasons why we shouldn't have great expectations for this move.
First, the Federal Reserve moves with all the surprise and guile of a lumbering elephant. It talks about moving, says what direction it might go in and at what speed, and provides a specific date on which it will act. It does so because it wants to avoid spooking the market. But it also means that the market tends to react well ahead of the actual event. Look at the path of the 10-year bond over the last several weeks. The interest rate on the 10-year bond has fallen from 3.2 percent on July 1 to about 1.9 percent today. The mere anticipation of the Fed's move has caused the market to do much of the Fed's work.
Second, given how low long-term interest rates already are -- they've fallen by 40 percent in the past three months -- this action is like pushing on a string, or adding another drop of water to a full pitcher. Pick your metaphor. Long-term borrowing costs for creditworthy borrowers are already at Crazy Eddie levels -- they're so low, they're insane. In August, according to Freddie Mac, the average commitment rate on 30-year mortgages it backed was 4.27 percent. Disney in August sold 30-year bonds that yielded 4.375 percent. Google in May sold three-year notes that pay a paltry 1.25 percent in annual interest. The government borrows for 10 years at less than 2 percent. That's all to the good. These lower rates help free up more cash for some people to spend, help corporations pay their bottom line, and lessen the fiscal bite of high deficits. But when you get close to zero, it becomes harder to make a bigger percentage difference. Money simply can't get much cheaper.
http://finance.yahoo.com/blogs/daniel-gross/fed-operation-twist-isn-t-much-shout-184504925.html
There are some reasons why we shouldn't have great expectations for this move.
First, the Federal Reserve moves with all the surprise and guile of a lumbering elephant. It talks about moving, says what direction it might go in and at what speed, and provides a specific date on which it will act. It does so because it wants to avoid spooking the market. But it also means that the market tends to react well ahead of the actual event. Look at the path of the 10-year bond over the last several weeks. The interest rate on the 10-year bond has fallen from 3.2 percent on July 1 to about 1.9 percent today. The mere anticipation of the Fed's move has caused the market to do much of the Fed's work.
Second, given how low long-term interest rates already are -- they've fallen by 40 percent in the past three months -- this action is like pushing on a string, or adding another drop of water to a full pitcher. Pick your metaphor. Long-term borrowing costs for creditworthy borrowers are already at Crazy Eddie levels -- they're so low, they're insane. In August, according to Freddie Mac, the average commitment rate on 30-year mortgages it backed was 4.27 percent. Disney in August sold 30-year bonds that yielded 4.375 percent. Google in May sold three-year notes that pay a paltry 1.25 percent in annual interest. The government borrows for 10 years at less than 2 percent. That's all to the good. These lower rates help free up more cash for some people to spend, help corporations pay their bottom line, and lessen the fiscal bite of high deficits. But when you get close to zero, it becomes harder to make a bigger percentage difference. Money simply can't get much cheaper.
http://finance.yahoo.com/blogs/daniel-gross/fed-operation-twist-isn-t-much-shout-184504925.html