Skip to main content

Insights on Interest Rates: Why Treasury Bonds Are No Longer the Market Bellwether

Divining the direction of interest rates used to be a lot easier. With the Federal Funds Rate, policymakers at the U.S. Federal Reserve would indicate precisely what they wanted the overnight lending rate between big banks to be. And the prices of U.S. Treasury securities of all maturities fell in line like obedient soldiers. But things have changed. Forget about watching the Fed Funds Rate now. That central bank benchmark has ranged between 0.00% and 0.25% for a couple of years now. Going forward, i t's not going to be an indicator of interest-rate movement, because it's not going to change much. Sure t he Fed wants it there. But more to the point, the Fed Funds Rate remains in that range because all the too-big-to-fail (TBTF) banks like Citigroup Inc. (NYSE: C ) and Bank of America Corp. (NYSE: BAC ) are far bigger now, are lending less, and have huge excess reserves on which they'd love to earn an overnight profit. So for now and for the foreseeable future, they'll be plenty to lend between giant "TBTF" club members. And t hanks to its " quantitative-easing " (QE) strategy, the Fed is essentially monetizing the U.S. Treasury's debt by buying in the secondary market from primary dealers like Goldman Sachs Group Inc. (NYSE: GS ) and JPMorgan Chase & Co. (NYSE: JPM ) the equivalent of every new issue that comes to market. The net result: There's no real gauge of demand because the Federal Reserve has hijacked the free market. To understand the workings of the "new" interest-rate market, please read on...
Data & News supplied by www.cloudquote.io
Stock quotes supplied by Barchart
Quotes delayed at least 20 minutes.
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.