200905.28
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Understatement of the Week

From the WSJ:

With long-end Treasury yields racing higher this week and wreaking havoc on the mortgage bond market, the Federal Reserve might have to tweak its Treasury purchase program sooner rather than later.

To date, the Fed has purchased a little less than half of the $300 billion it has pledged to buy in Treasurys by the fall, yet long-end Treasury yields have continued to trek stubbornly higher since March and are now beginning to pull mortgage rates up with them.

To keep rates from moving even higher from here, now is the prime time for the Fed to fine-tune its programs. That may not necessarily mean increasing the amount it buys — which might have the unwanted effect of undermining the dollar. Rather, the Fed should be more targeted in the maturities it buys, Treasury market participants urge.

Let’s look at a chart of the Ten Year Treasury Note Yield:

Yields are now roughly 120 basis points (1.2%) higher than they were before the Fed announced their asset purchase plan. The idea that the Fed could control a several trillion dollar market with a mere $300 billion in purchasing power was a fantasy. It’ll take more than tweaking to get rates back down. And that presents a problem. If the Fed raises the amount they intend to purchase it will further spook bond owners already worried about inflation and they will sell into any bid the Fed puts out there.

President Clinton got a lesson from the bond market vigilantes when he first took office and it looks like President Obama is getting the same lesson. You can’t borrow and spend your way to prosperity because the bond market won’t let you. There is no free lunch. Ever.

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