Chart of the Day: 10-Year Treasury Yields Hit New Low

The Federal Reserve's latest attempt to push down interest rates was just announced this afternoon, but it already appears to be working. On the news, the market pushed 10-year Treasury yields down to a ridiculously low 1.86%. That's a new, as in as far back as the Fed's data goes, low. Who are the winners and losers here?

In case you missed the news, the Fed announced today that it will swap out $400 billion of its shorter-term Treasuries for longer-term government debt. Its goal is to push down longer-term interest rates. As mentioned, the market is already beginning to price in the higher demand the Fed will create for longer-term bonds by pushing down their interest rates.

Here's the historical chart for 10-year Treasuries (the green line shows the new low yield where the market closed today):

10yr Treas 2011-09-21.png

The influence of yields this low should be felt across the U.S. economy, but a few sectors, in particular will definitely notice.

One obvious target here was mortgages. Their interest rates tend to follow 10-year Treasury yields, so we can be fairly certain that they're headed downward too. In fact, the Fed appeared to be aiming directly at mortgage rates with its action today, since a part of its announcement today included a new policy to reinvest the principal it gets from maturing agency bonds and mortgage-backed securities in additional agency MBS. Up to now, it only reinvested that principal in Treasuries.

The U.S. government will also benefit. It will have the opportunity to lock in extremely low interest rates on its longer-term debt. It could take advantage of the Fed's program by issuing more longer-term debt than usual, but increasing supply in this way would also make the program less effective at pushing down interest rates. At the very least, the long-term government bonds issued over the period during which the Fed policy is in effect will help the U.S. manage its borrowing costs a little more easily for an extended period.

Who might not be thrilled about this news? Banks. Many rely on the strategy of funding themselves with short-term debt and selling longer-term loans. They then capitalize on the spread between the relatively low-yielding shorter-term debt and the higher-yielding long-term debt they sell. As these yields move closer together through the Fed's new policy, banks' profits should decline a bit.

Of course, any consumers or businesses who want cheap loans that would last six years or more will have a big incentive to pursue them over the next nine months. Longer-term interest rates will likely continue to decline from here. We'll have to wait to see whether or not rates will be low enough to entice Americans to obtain more credit despite their reservations about investing or spending at a time when the economy remains relatively weak.