The European Central Bank has cut interest rates by 75 basis points, to 2.5% and the Bank of England has cut by a full percentage point to 2% from 3%.
Prior to the announcements, the yield on 10-year U.S. notes had fallen to 2.54%; it has since risen to 2.63%. Just days ago, the yield on the 10-year had fallen to 2.99%; in its entire history, the 10-year had never traded below 3%. Even more spectacular is that the 30-year bond is at 3.15%. For decades, the floor had been 4%.
“Lower yields should act as incentive for investors to develop a more healthy appetite for risk by the second quarter of 2009. Should this occur, it should have a positive impact on the economy in the form of the ability of corporations to issue debt to capitalize operations and expansions,” says Carley Garner, bond trader at DeCarley Trading LLC. “Additionally, confidence in equities and firming stock prices may relieve the tension currently experienced by consumers and encourage spending once again.”
Garner says that short-term rates at this point have nowhere to go but up, and that the same goes for longer-term Treasuries; the only question is when. Given the ever growing amount of cash that the Fed needs to raise and the enormous supply of Treasury bonds, notes and bills it has created has served to dampen the extraordinary rally the market has enjoyed.
