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Treasury Yield Curve

Yield Curve

FED Update

FED Removes “Extraordinary" Credit Access

The Federal Reserve on Thursday took another step in its efforts to wind down its extraordinary actions to prop up the nation’s financial system by raising the interest rates banks must pay to take out emergency loans. The Fed emphasized that the increase in the discount rate, to 0.75 percent from 0.50 percent, which takes effect today, did not represent a broad tightening of credit. Rather, it was part of an effort to withdraw the Fed’s expansive support for the financial system, even as it leaves in place ultra-low interest rates to support the economy more broadly. The Fed also shortened the terms of those emergency loans from a maximum of 30 days to one day. In addition, it raised the minimum rate on its Term Auction Facility to 0.50 percent from 0.25 percent, and wind down the facility on March 8.

The move was largely symbolic, as financial institutions generally do not need to borrow from the discount window. In the Fed’s statement, it noted that the central bank was only trying to return to normal spreads between short-term interest rates. Before the financial crisis started in 2007, the discount rate was a full percentage point higher than the federal funds rate, a gap that indicated the penalty banks had to pay to access emergency funds. As financial markets froze in August 2007, the first major step the Fed took to address the crisis was to narrow that gap, a step intended to ease the availability of credit. “The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds,” the Fed said it its statement yesterday.

Despite the Fed’s assurance that this move did not signal a move toward higher rates that would impact consumers, many market participants felt otherwise. The two-year note yield increased four basis points immediately after the release, and equity futures fell roughly one percent. Fed funds futures prices still suggest little chance the Fed will raise its short-term target rate any time soon. There is a zero percent chance of an increase priced in by the April 28th Federal Open Market Committee meeting, and a ten percent chance of a 25 or 50 basis point hike by the June 23rd meeting.

Economic Commentary

Friday, March 12, 2010

Treasury security prices fell Thursday at all maturities except the very longest. The 30-year bond gained on strong demand for the security at yesterday's auction of $13 billion of the bonds. The bid-to-cover ratio was 2.89, the highest level since September. Direct bidders bought more of the issue than indirect bidders for the first time since the 30-year bond was reissued in 2006. The yield on the two-year note jumped five basis points to 0.95%. The yield on the benchmark 10-year note rose one basis point to 3.73%.

The U.S. trade deficit unexpectedly narrowed 6.6% to $37.3 billion from $39.9 billion in December, the Commerce Department reported yesterday. Imports fell 1.7% to $180 billion, the first drop in five months, as refineries imported the fewest barrels of oil in a decade. Exports decreased by $500 million to $142.7 billion, the first decline in nine months, as shipments of aircraft and autos fell.

First-time claims for unemployment benefits fell by 6,000 to 462,000 in the week ended March 6, the Labor Department reported yesterday. The four-week moving average of claims, a less volatile measure, increased to 475,500 from 470,500 the prior week. Continuing claims rose by 37,000 to 4.56 million in the week ended February 27. This does not include those receiving extended benefits under federal programs. The number of people who have used up their traditional benefits and are now collecting extended benefits decreased by about 174,830 to 5.69 million in the week ended February 20. The Senate approved a bill Wednesday that would provide another $138 billion in extended unemployment benefits and additional aid to states. Federal Reserve Bank of New York President William Dudley said the government needs to reduce budget deficits even though the economy is weak. "The economic recovery is still very fragile," Dudley said in a speech in London yesterday. Nonetheless, failure to address rising deficits "is a risky strategy" and could undermine investor confidence, he said.

The information contained herein has been obtained from sources deemed to be reliable: however Southeast Corporate does not guarantee its accuracy or completeness. All opinions and estimates included in this report constitute Southeast's judgment as of the date of this report and are subject to change without notice.