Fed’s Yellen: Rise In Treasury, Mortgage Yields ‘Disconcerting’

June 5, 2009 by · Leave a Comment
Filed under: Opinion 

This is a very interesting article from the WSJ with San Francisco Fed’s bank President Janet Yellen.  In this article she is discussing the recent rise in interest & mortgage rates.  An official that is cited to that the recent purchases of Treasuries by the Federal Reserve would keep interest rates lower.   This is contrary to what is the market perception when this type of monetary policy to used.  

Usually foreign investors would purchase our bonds (Treasuries), that would be how we would finance our needs including budgets or in this case to drive down interest rates through these open market purchases. Our problem is that we have many more bonds that need to be sold than we have buyers ready to purchase them.  Instead we have embraced the extreme fiscal policy of quantitative easing which is essentially having the Federal Reserve buy our debt (bonds) which is basically buying it from ourselves through a third party (The Fed).  

The interesting part was how they would think that this would keep interest rates low,  investors are demanding more yield on this bonds because they know that we will have plans to issue many more than the market can absorb so that in fact means that we will keep practicing QE and basically print dollars to meet our needs.  You will get higher yields because the investors in the promises to pay, want compensation to accept the high likelihood that they will be paid back in devalued dollars in the future.

Some how they think this will not be inflationary.   It will be, you can’t load all these banks and other financial institutions will fresh cash and think that it will not be speculated into the economy when we have driven interest rates to the ground and are banking on a recovery.  When you have real rates of return this low with a inflation rate that is higher than the interest rate, you essentially “force” people to speculate so they can get a return that matches the rate of inflation.

If you can looked at all major indexes and focus on the resource equities, they are all up since the beginning of the year and that will equate into high prices as it moves downstream.   From all the monetary history I have read, inflation is a monetary event when you dramatically increase the money base (aka: print more dollars).  The market does not like what the future may hold so this is how the purchasers of bonds get their message across.

News (Wall Street Journal):

Federal Reserve Bank of San Francisco President Janet Yellen said if the increase in Treasury and mortgage yields is being fueled by rising inflation fears – worries she considers unfounded – it would be “disconcerting.”

The Federal Reserve has been buying Treasurys and mortgage debt over the last several months, in a bid to lower borrowing costs both across the broader economy, and in the hard hit housing market. Officials have hoped their purchases would keep yields lower than they would otherwise be, thus adding an additional avenue of support for their extensive campaign to restart both the financial system and the broader economy.

But for some time now, yields on longer-term government debt and mortgages have been rising. Investors are reacting to spiking government borrowing levels and an expectation that very stimulative Fed policy, coupled with a recovering economy, will drive inflation levels higher, perhaps dramatically so.

The higher yields blunt the effectiveness of Fed policy and suggest the Fed may have to be even more aggressive with its future buying of Treasury and mortgage securities.

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