Treasuries Update: Yields Rise Further Off Their Historic Lows

The Fed's latest strategy for managing the economy, Operation Twist, has a month to go. The program was announced on September 21st of last year with the stated purpose of selling $400 billion in shorter-term Treasury securities by the end of June 2012 and using the proceeds to buy longer-term Treasury securities. The Fed assumed this would put downward pressure on longer-term rates, which would stimulate the economy through "a broad easing in financial market conditions." In other words, more loans at lower rates.

How effective has this strategy been? Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.


At face value, it would appear that the Fed has been successful in driving rates lower. However, the extreme plunge in Treasury yields at 5-years and longer was presumably not part of the Fed's goal. We can attribute this trend to financial fears around the world as the Eurozone teeters on disaster and emerging markets appear increasingly wobbly as well.

The 30-year fixed mortgage, according to the latest Freddie Mac weekly survey, is at its all-time low at 3.67. That probably suits the Fed just fine. But, as for loans to small businesses, the Fed strategy is a solution to a non-problem. Here's a snippet from the latest NFIB Small Business Economic Trends report:

91% of all owners reported that all their credit needs were met or that they were not interested in borrowing. 29% reported all credit needs met, 9% reported that not all of their credit needs were satisfied (the record low is 4%, reached in 2000), and 47% said they did not want a loan (62% including those who did not answer the question, presumably uninterested in borrowing as well). Only 3% reported that financing was their top business problem, compared to 22% citing taxes, 20% citing weak sales and 19% naming unreasonable regulations and red tape.

It will be interesting to watch yields during the final days of Operation Twist. How much further can they drop? And, given the renewed signs of weakness in the US jobs market, is there anything useful that the Fed can do as a post-Twist cure for an ailing economy?

Background Perspective on Yields

The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.


The next chart shows the 2- and 10-year yields with the 2-10 spread highlighted in the background.


The final chart is an overlay of the CBOE Interest Rate 10-Year Treasury Note (TNX) and the S&P 500.

For a long-term view of weekly Treasury yields, also focusing on the 10-year, see my Treasury Yields in Perspective.