The below explains the recently falling 10-year Treasury yield this year. The bottom line is the Fed’s QE has taken all the supply out of the market (it’s on their balance sheet). They are doing this to keep mortgage rates low, which are priced off the 10-year Treasury. Shouldn’t the government be issuing as much long-term debt now as possible and locking in these historically low rates (only 5% is 10 years or longer outside of the Fed)? That’s what Fortune 500 companies seem to be doing these days, issuing 30-year debt (one even issued 50-year debt)…

…Also, with the U.S.’s annual deficits anticipated to increase significantly in years to come as a result of our growing senior population and exploding entitlement costs, there may come a day where we will be staring massive annual debt renewals (and new debt issuance) in the face, much of which we could have avoided by prudently, materially lengthening the maturities of our debt today. It’s the old saying about debt/loans: “Take it when you don’t need it, because when you do need it, you can’t get it”. This seems to me another huge, hidden future cost of the Federal Reserve’s easy money policies?” , Mike Perry, former Chairman and CEO, IndyMac Bank

“Which leads me to… buyers of 10-year T-Notes and 30-year T-bonds are facing a potential shortage of supply! Huh? Can’t the government just issue more? Excluding those held by the Federal Reserve, Treasuries due in 10 years or more account for just 5% of the $12.1 trillion market for U.S. debt. Bloomberg reports that, “New rules designed to plug shortfalls at pension funds may now triple their purchases of longer-dated Treasuries, creating $300 billion in extra demand over the next two years that would equal almost half the $642 billion outstanding, Bank of Nova Scotia estimates. Fewer available bonds, along with a lack of inflation and increased foreign buying, help to explain why longer-term Treasuries are surging this year even as the Fed pares its own bond purchases. The demand has pushed down yields on 30-year government debt by more than a half-percentage point to 3.37 percent, the most since 2000, data compiled by Bloomberg show.” And as we all know, other things being equal, when demand goes up, prices go up, and rates go down.”, Excerpt from Mortgage Industry Newsletter, May 2014

Posted on May 19, 2014, in Postings. Bookmark the permalink. Leave a comment.

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