The Fed's Massive Market Support Ends Today

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The Federal Reserve’s seven-month $300 billion treasury purchase program ends today.

It’s a big moment since this program has helped keep ‘risk-free’ interest rates artificially low in the face of global concern towards the dollar, U.S. deficits, and the U.S. financial system.

Low U.S. rates have heavily influenced other countries, especially those whose currencies are linked to the dollar, mildly to massively inflating asset bubbles depending on your view.

Most of all, lower interest rates have helped keep U.S. mortgage rates down, thus supporting the U.S. housing market.

So let’s see what happens to U.S. treasury rates, and by association the economy, housing, and asset markets, once these training wheels come off.

Bloomberg: The Fed is slated to acquire Treasuries maturing between December 2013 and April 2016 at 10:15 a.m. New York time. The central bank has purchased $298.063 billion of government debt securities through today.

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 per cent 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 per cent on June 11, they have since fallen back, ending at 3.42 per cent yesterday, according to BGCantor Market Data.

Mortgage rates for 30-year fixed home loans averaged 5 per cent in the week ended Oct. 22, down from as high as 6.63 per cent last year, according to McLean, Virginia-based Freddie Mac. The rate was 5.05 per cent in March.

Corporate bonds yield 5.9 per cent on average, down from 10.3 per cent in March, according to Merrill Lynch & Co. index data. Borrowers have sold $1.11 trillion in U.S. corporate bonds in 2009, the fastest pace on record, according to data compiled by Bloomberg.

Fed Chairman Ben S. Bernanke and his fellow policy makers indicated last month for the first time since August 2008 that the economy is accelerating, even as they recommitted to keep rates “exceptionally low” for an “extended period.”

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