The gap between rates implied in the future by the so-called yield curve of actively traded securities and the administration’s forecasts may be narrower than just looking at the raw numbers suggests. Demand for government bonds has been elevated by Federal Reserve purchases and new rules requiring banks to buy the safest assets for their reserves, which have depressed the compensation investors demanded for holding longer-term debt.
The Fed has bought more than $2.3 trillion of Treasuries and other securities since 2008, and plans to continue purchasing a combined $85 billion of government and mortgage debt a month to pump money into the financial system. Deposits at U.S. banks exceed loans by $2 trillion, with much of the surplus used to buy Treasuries. Bank holdings of Treasuries increased 15% to $521.3 billion in the past year.
While slower growth would make it harder for Obama to meet his deficit goals, yields below the administration forecast would limit government debt-service costs. Interest on the $16 trillion debt has fallen as Treasury yields stayed about record lows. The U.S. spent $359.8 billion on financing expense in fiscal 2012, down from $454.4 billion in 2011.
Yields on 10-year notes rose five basis points, or 0.05 percentage point, to 2% last week, according to Bloomberg Bond Trader data. The benchmark 2% note maturing in February 2023, sold Feb. 13, finished the week at 99 31/32. The yield was unchanged at 12:34 p.m. in New York.
Treasuries lost 1.1% in January, the worst start to a year since 2009, according to Bank of America Merrill Lynch bond indexes. The yield on the benchmark 10-year note has risen 25 basis points from 1.76% at the end of last year.
Fed debt purchases have pushed corporate and consumer borrowing rates down. Yields on investment-grade corporate bonds dropped to a record low 2.73% on Nov. 8, compared with the 10-year average of 5.02%, according to Bank of America Merrill Lynch bond indexes. Freddie Mac said last week rates on 30-year mortgages averaged 3.53%, down from 6.74% in 2007.
Yields on 10-year notes are forecast to climb to 2.25% by the end of the year, according to the median estimate of 65 respondents in a Bloomberg News survey. The last time rates were above 4.9%, the average for 2017 anticipated by the Office of Management and Budget, was in July 2007 as the financial crisis was mounting.
Obama said in his Feb. 12 State of the Union address that even though the labor market is improving, more needs to be done to create jobs. He proposed raising the federal minimum wage to $9 an hour from $7.25 by 2015 and spending $50 billion on urgent infrastructure projects.
“What we’ve seen over the last couple of years from both the Federal Reserve and the fiscal authorities is that they are overly optimistic on their growth expectations,” Guy LeBas, the chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview on Feb. 14.