Fed plan, fear push 10-year yield to record low, but corporate borrowing costs aren't falling | StarTribune.com

WASHINGTON - Interest rates on government debt plunged Thursday as investors bought Treasurys, seeking safety from the global stock selloff.

The Federal Reserve's bond-buying program announced a day earlier also boosted demand for Treasurys. There were hints, however, that the program was not having one of its intended effects — reducing borrowing costs for companies. One of the Fed's goals with the program is to encourage business investment by making it easier for them to borrow.

Instead, the Fed's own dim view of the economy increased fears about a new recession. That helped push the 10-year Treasury note's yield to a record low of 1.71 percent Thursday, and the 30-year bond's yield posted the steepest two-day drop since November 2008.

Treasury yields fall as demand for them increases. More buying means higher prices, which eat into traders' returns.

The Fed had hoped that super-low rates on the 10-year note would make Treasurys less attractive, causing traders to make higher-risk bets. Interest rates for loans such as mortgages track the 10-year yield. A lower interest rate might spur investment and spending. Both slowed as the economy weakened this year.

For most companies, analysts say, economic weakness and shaky stock markets are having more of an effect, causing their borrowing costs to increase.

"Everything is getting trashed except for Treasurys," said Kim Rupert, managing director at Action Economics LLC. "If you have recession fears — even Depression fears, in Europe — that's not a good environment for most corporate credit," she said.

The reason: The fear that's driving traders into Treasurys makes companies look like riskier bets. And on a day like Thursday, traders are trying to reduce their financial risk.

In credit markets other than government debt, there was little evidence Thursday that borrowing costs are coming down.

Two funds representing baskets of high-yield corporate bonds lost 1.5 percent on Thursday. That means borrowing costs for those companies increased sharply. A fund representing very safe bonds edged up only 0.3 percent — a much smaller gain than Treasurys showed.

The market's economic worries more than offset any benefit from the Fed's action, said Chad Morganlander, a portfolio manager with Stifel, Nicolaus & Co.

"The behavior of interest rates won't assist the economy as (stock) markets, in particular, go down," he said.

Shares plunged in Asia and Europe as traders digested the Fed's bleak economic outlook. Markets in Germany, France and London all closed down about 5 percent. U.S. stocks followed them lower, with the Dow losing 3.5 percent.

Borrowing costs for companies have increased in the past three months, Morganlander said. He said those higher borrowing costs are a strong early indicator of possible recession. His group estimated two months ago that the economy has a 50-50 chance of returning to recession.

Higher borrowing costs make businesses reluctant to invest. A key indicator of business investment plans fell steeply in July, the most recent month for which data is available.

Meanwhile, the yield on the 30-year Treasury bond dropped sharply. Traders were surprised by the Fed's plan to invest heavily in this area, because the 30-year yield has limited effect on borrowing rates in the rest of the economy.

At 4:10 p.m. Eastern time, the yield on the 10-year Treasury note was 1.73 percent, down from 1.86 percent late Wednesday. Its price rose $1.16 for every $100 invested.

The 30-year yield fell to 2.80 percent from 2.99 percent late Wednesday. That's the lowest since January 2009, not long after the scariest part of the financial crisis. Its price rose $4.25 for every $100 invested.

The yield on the two-year Treasury was flat at 0.2 percent. The yield on the six-month Treasury bill fell to 0.02 percent from 0.03 percent late Wednesday. Its discount wasn't available.

by Daniel Wagner Associated Press September 22, 2011 - 4:02 PM


Fed plan, fear push 10-year yield to record low, but corporate borrowing costs aren't falling | StarTribune.com