DECLINE IN TREASURY BOND INTEREST COULD BENEFIT LOWER-RISK OFFERINGS
The most important development in the capital markets in the past month was the Federal Reserve’s announcement that it will initiate a massive Treasury Bond repurchase program, which drove down medium and long-term bonds by as much as 50 basis points.
Given that short-term rates are very close to 0 percent, this strategy achieves the dual benefits of increasing the money supply (lowering rates generally) and concentrating the benefit of lower rates on the maturities that are repurchased. The current view is that this focused reduction in rates will be targeted to benefit home mortgage rates, so expect repurchases primarily in the two- to 10-year maturities. That could be good news for commercial debt rates as long as the benefits of lower treasury rates are not fully offset by higher risk premiums.
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