Note from dshort: I've updated the charts below to include today's decline in both equity prices and Treasury yields.
We're well into our sixth month since the latest Federal Reserve intervention, Operation Twist, was officially announced on September 21. We've now 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 month 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). The thud to the FFR bottom coincided with the first of two rounds of quantitative easing in an effort to promote increased lending and liquidity.
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 latest major strategy, Operation Twist, will run through June 2012. The Fed is selling 0 billion of shorter-term Treasury securities and using the proceeds to buy longer-term Treasury securities in an effort to lower interest rates.
The yield on the 10-year note closed at 1.88 on the day of the "Twist" announcement and on the following day closes at the historic low of 1.72. The interim post-twist yield highs for the 10 and 30 had been 2.42 and 3.45, respectively, on October 27. But on March 19, three weeks ago, the 30-year hit a new interim closing high yield of 3.48.
We still a bit over two and a half months of "Twist" left, so it's too soon to make a firm pronouncement the success of this strategy for lowering interest rates. According to the Freddie Mac survey, the 30-year mortgage rate has fluctuated between 4.22% and 3.87% since the first week in September, and the most recent average as of was at 3.98%. Here is a snapshot of the 10 and 30 year Treasury yields and the 30-year fixed mortgage (excluding points).
The 30-year mortgage is near the bottom of the range, and two Treasuries are somewhere between their interim highs and lows.
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.
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.
Source: Advisor Perspectives
