Bond markets defy Fed as Treasury yields spike

My contacts in the mortgage market tell me that all hell was breaking loose on Wednesday as interest rates soared on mortgage bonds. The last thing the Fed and Treasury want to see is rising interest rates in the bond market. It is obvious from the big bounce in Treasury prices that the government has heavily interveaning on Thursday and Friday trying to get yields down. Although it did have the desired effect short term, but longer term it is the market that will set rates, not the Fed. The dollar hit a new low on Friday not helping matters.-Lou

Bond markets defy Fed as Treasury yields spike

The US Federal Reserve may soon be forced to launch fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long-term borrowing costs.

By Ambrose Evans-Pritchard-Telegraph May 29, 2009

Yields on 10-year Treasury bonds have risen relentlessly since March when the Fed first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed's implicit target.

Yields have jumped to 3.69pc – after spiking as high as 3.74pc on Wednesday – pushing up the standard 30-year mortgage loan to 5.08pc and lifting the borrowing cost for corporations.

The Fed is going to have to consider doubling its purchases of Treasuries," said Ashraf Laidi, from CMC Capital Markets. "We could be nearing the end-game for the US dollar but the Fed has little choice at this point. We're in a vicious circle where any policy aimed at supporting the US economy must be at the expense of the dollar."

The US Mortgage Bankers Association yesterday highlighted the fragility of the US housing market, reporting that 12pc of homeowners are either behind on their payments or facing foreclosure, the highest level since records began.

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