Fed's Not Cutting Rates, But Treasury Is
11/15/2000
Dow Jones News Services
(Copyright © 2000 Dow Jones & Company, Inc.)
By Steven Vames
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The Federal Reserve is unanimously expected to leave interest rates unchanged Wednesday, but the Treasury Department has been helping to lower rates all year.
The Fed's policy-making Federal Open Market Committee is currently meeting, and will release a statement at 2:15 p.m. EST.
Even with the uncertainty that's been imposed on the long-term fiscal outlook by the electoral standoff in Florida, the Treasury will continue to lay out hefty sums to investors in the form of debt buybacks, paydowns, and coupon payments, economists say. For investors, a large portion of that money will make an immediate about-face back into the Treasury market, which in turn will help drive market rates lower.
As many have pointed out, this process is creating a classic case of Treasurys demand outstripping supply. And when that happens in the bond market, prices of securities move higher and yields, or market interest rates, move lower.
"When you see net cash flows out of the government bond market like this because of debt reduction, there is no doubt that reinvestment of those flows will be very supportive for the bond market," said Louis Crandall, chief economist at R.H. Wrightson & Associates in New York.
This week alone, the Treasury is set to return about $30 billion to investors in coupon securities alone. That comes from $10.4 billion in paydowns on its quarterly refunding which settles Wednesday, $1.4 billion in debt buybacks settled Monday, and about $20 billion in coupon interest payments that go out Wednesday.
Because the effect of debt reductions have been ongoing, their immediate impact on the market is not necessarily the same as if the Fed came out of its meeting Wednesday and declared it would lower the Fed funds inter-bank lending rate.
But the lower interest rates spurred by the debt reduction is probably even more important for U.S. businesses and consumers, because many of the rates they pay are priced with respect to Treasury yields.
And the lower rates initially came in the face of rising Fed funds rates last year and early this year, creating a counteractive force that has left a near-zero net effect on many non-Treasury rates.
The Fed has raised its Fed funds rate by 1.75 percentage point since June 1999, and 1.25 percentage point of that has come since Nov. 16. In the same 12-month period, the 30-year mortgage rate, for example, has barely budged. Last week, the 30-year mortgage rate stood at 7.79% versus 7.67% in the same week last year, according to mortgage giant Freddie Mac.
This disconnect between mortgage rates and the Fed funds rate can be explained with reference to the performance of the 10-year Treasury note, against which 30-year mortgages are priced.
The 10-year Treasury note is trading Wednesday at a yield around 5.73%, compared with about 5.95% a year ago, despite the heavy Fed tightening in the period between now and then.
And economists say that no matter who wins the hotly contested presidential elections, the budget surplus will probably persist at least over the next several years. That points to more debt reduction and a continued damping effect on interest rates. |
