10-year Treasury Note Yield and Mortgage Rates after March 18, 2009
The March 18 FOMC policy statement noted the following:
“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”
The 10-year Treasury note yield closed at 2.51% on March 18, reflecting a 51 bps rally compared with the close on March 17, 2009, and has since held above the March 18 reading (see chart 1). The 10-year Treasury note yield on April 24 was 3.03% and as of this writing it was trading around 2.97%. The Fed has purchased $73.742 billion of Treasury securities between March 23, 2009 and April 27, 2009 (Federal Reserve Bank of New York - Permanent Open Market Operations). Chart 1 indicates the Fed has not succeeded in guiding Treasury securities lower after the announcement. The goal of the purchase program is to buy $300 billion of longer-term Treasury securities over a six-month period. Effectively, the Fed has roughly $226 billion of Treasury securities more to purchase under this program.
The good news is that mortgage rates have declined further after the Fed expanded the purchase of mortgage-backed securities ($1.25 billion, up from prior announcement of $750 billion) and agency debt ($200 billion, up from earlier plan of $100 billion) as per the March 18 announcement (see chart 2). The 30-year mortgage rate stood at 5.03% during the week ended March 20 and was quoted at 4.80% as of April 24.
Japan: Deeper Into the Red
At this early stage in the global recession, most of the industrialized economies are still only speculating when production will turn around or at least stop contracting so rapidly. The US consensus is that growth will return by the end of ’09, while Europe remains a mixed bag of hard landings and slow recoveries. Today, Japan’s government released a revision of its own outlook, and placed itself amongst the worst-off of the G-7 countries.
In the government’s latest biannual economic outlook, the fiscal year just ended in March experienced a 3.1% contraction in GDP, while the current FY2009-2010 will experience a sharper slide of 3.3%. The latter figure is a dramatic revision from October’s forecast of 0% growth, and is somewhat more pessimistic than recent statements from Tokyo suggesting a recovery starting in Q1 2010. Expectations for exports and business investment were also slashed across the board, with the only positive figure coming from minor growth in public consumption – courtesy of the fiscal stimulus package that came into effect at the beginning of the month. In short, the government has conceded that it will not be able to export its way out of this recession, and eight quarters of contracting GDP (starting in Q2 2008) might even be a little optimistic.
However, something good may yet come out of all of this – at least for the ruling LDP. PM Taro Aso and his party have not surprisingly taken a beating in the opinion polls over the past six months, and with general elections due this year there was every likelihood that this icon of Japan’s government would be run out of Tokyo entirely. But, a scandal within the opposition Democratic Party (DP) has offered a brief window of opportunity and it appears Aso is pouncing on it. To counter the particularly negative themes of this latest outlook, Aso’s Cabinet is proposing another fiscal stimulus package for FY2010-11. Furthermore, his government submitted a supplementary stimulus package worth ¥15.4 trillion ($159 billion) and all but challenged the opposition-controlled upper house to stall the legislation and force him to call an early election. After being hobbled by scandal, Aso’s dare forces the DP to either roll the dice at the ballot box or cede the economic momentum back to the LDP.
This supplementary budget will only provide a limited offset to the gripping recession, and throw a few trillion more yen on Japan’s ever-growing mountain of debt. However, it will do something for the current government’s political survival, and perhaps assure the Japanese that, despite such a grim outlook, there will be better days ahead.
