Fed Ending Treasury Purchase Program that Kept Yields Down

The US Treasury Department today is buying the last of the $300 billion in Treasury bonds, bills, and notes it has purchased over the last seven months to keep rates low. The program, which prevented the yield on the 10-year Treasury bill from going over 4% during this period, helped keep mortgage rates and corporate bond rates low.

According to an article on Bloomberg:

"Longer-maturity Treasuries rallied the most since 1962 when the Fed said March 18 it would start buying the securities. That day, Treasury 10-year yields fell almost half a percentage point to 2.52 percent as the Fed surprised investors by expanding the debt purchase portion of its so-called quantitative easing policy, which already included $1.45 trillion of agency and mortgage-backed debt.

While yields subsequently rose to an intraday high of 4 percent on June 11, they have since fallen back, ending at 3.42 percent yesterday, according to BGCantor Market Data".

The Treasury program was successful in bringing rates down. 30-year mortgage rates were 6% in higher last year and are now trading in the low 5% range. We'll have see what happens to rates as the progam ends. The Treasury is betting that a stronger economy and housing market will be able to bear increased rates. It remains to be seen if housing can continue to recover with rising mortgage rates and the potential expiration of the $8,000 homebuyer tax credit.

It also remains to be seen how yields will react to increased Treasury sales. Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20. That's a significant increase in Treasury debt that must be absorbed by the market.