Interest rates held steady at the close of Monday September 22, 2009.  Treasury rates mostly ran in place, ending the day where they started. 

The three month Treasury showed some life by rising three basis points or 3/100 of a percent, however the three month had dropped on Friday when other short term Treasuries held steady.  The rise in the three month appears to be a correction from the unusually low level reached on Friday.  On Monday, the three month Treasury rested at 0.11%.

The six month Treasury was unaltered on Monday, closing at 0.20%.  The one year treasury rate was down by just one basis point to close at 0.40%.  The two year Treasury was also down by one basis point to end at 1.02%.  The five year fell by two basis points moving from Friday’s close of 2.49% to 2.47% on Monday.  The ten year Treasury was steady, maintaining a yield of 3.49%. 

The Fed starts another two day meeting session today to discuss the economy, rates and the Fed purchase programs.  The consensus view is that little new information will be released from this meeting other than a time horizon on winding down the Fed’s mortgage purchase program.  The Fed already noted they are closing the Treasury securities purchase program down early but that program had already reached 90% of its commitment in buying Treasury notes and bonds while the mortgage securities purchase commitment is at approximately 60% of its total purchase commitment.  

The original Federal Reserve position in the purchase program stated that will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.  In addition, the Federal Reserve will buy $300 billion of Treasury securities.

The purchases and/or sales of Treasury securities on an outright basis by the Fed has been used historically as a tool to manage the supply of bank reserves to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee.  Whether that is the truly the intention this time or whether the Fed is simply helping to monetize the deficit is up for debate.  Even with a one trillion dollar deficit, $300 billion in purchases is a large component.

The stated goal of the program for mortgage debt purchases, combined with the purchases of mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae which was originally announced on November 25, 2008, is to reduce the cost and increase the availability of credit for the purchase of houses.  The purchases of the direct mortgage debt obligations are intended to narrow the spreads between rates on mortgage-backed securities direct obligations and U.S. Treasury debt. 

The stated goal has certainly been reached up until this point, with mortgage rates remaining low and the unprecedented supply of Treasury securities issued to finance the Obama deficit being absorbed at very low rates by the market.  The big question is what will happen as the Fed ends these purchase programs.  Will interest rates including bank CD rates start to climb?  For those who scream a resounding yes, don’t forget the Fed statement from the August meeting went like this, “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  And lets not forget,  fed fund rates will drive CD rates as well as most all short interest rate securities whether that is up or down.

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