Note from dshort : I've updated the charts in this commentary in commemoration of yet another all-time low in the 30-year fixed-rate mortgage as tracked by Freddie Mac. Note also that the last chart now reflects the July WSJ forecasts for the 10-year note yield. Today's closing yield of 1.50% is just three basis points off the record low of June 1st, and the 30-year is just four basis points off its June 1st low.
The current Federal Reserve intervention, Operation Twist, which was set to expire at the end of June, was extended through the end of the year at last month's FOMC. We've seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three months before the all-time high in the S&P 500.
Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the collapse of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the Lehman bankruptcy filing, the Fed really swung into high gear. The FFR fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy), now in its fourth year.
If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke's speech at the Fed's 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2.
The current major strategy, Operation Twist, will run through December 2012. By the end of the program, the Fed will have sold in the neighborhood $667 billion of shorter-term Treasury securities and using the proceeds to buy longer-term Treasury securities in an effort to lower interest rates. The original Twist was set at $400B with the additional of $267B during the extension.
Here is the key excerpt from the FOMC statement:
|The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less.|
Details on the extension purchase specifics are available here on the Fed's website.
With the extension of Twist, we obviously can't make a definitive pronouncement on the success of this strategy for lowering interest rates. Changes can be sudden in this global atmosphere of economic unrest, and the volatility in markets around the world is a bit nervous-making. However, according to the Freddie Mac survey, the 30-year mortgage rate has fallen to 3.62%, an all-time low. Here is a snapshot of selected Treasury yields and the 30-year fixed mortgage (excluding points). At this point, the Fed has clearly had some success with "Twist". The extension suggests that we have a more serious financial illness than the initial prescription could relieve but that Fed preferred compromise gesture toward additional intervention without the outright aggression of another round of Quantitative Easing.
The past three years have been an exciting time for many professional traders and their seasoned amateur counterparts. And it's been a dream-come-true for institutional HFT (high frequency trading) with computerized algorithms. Of course, there have been perils, even for seasoned pros. The bankruptcy of MF Global is a grim reminder. And now the more recent travesty of JPMorgan's trading strategy has been trumped by the ongoing Libor scandal.
On the other hand, savers — those benighted souls looking for income from CDs, Treasury yields, and FDIC insured money markets — have had a rude introduction to the new reality, one that will apparently be with us for a very long time.
Additional perspectives : Here is an overview of Federal Reserve management of the Fed Funds Rate and the behavior of the 10-year Treasury yield — data through the latest weekly close.
Here is the recently released July WSJ survey of economists on the future of the 10-year yield.
As we can readily see, some economists are not convinced that yields will remain in the basement for the duration of the Fed's putative ZIRP timeframe. This last chart is based on survey that took place from July 6-10, so it incorporates the reality of the Fed's extension of Operation Twist.