With the economy now firming, the Fed may say as soon as today that it will curtail its stimulus. Policy makers will likely reduce monthly purchases of Treasuries to $40 billion from $45 billion, according to a Bloomberg News survey of economists. They will maintain mortgage-bond buying at $40 billion, the survey showed.
Yields on 10-year Treasuries, a benchmark for everything from corporate bonds to mortgages, have risen to 2.86% from 1.76% on Dec. 31. Apple’s 2.4% bonds have fallen 11.3 cents since they were issued to 88.6 cents on the dollar, pushing the yield up to 3.83%.
The Fed embarked on its stimulus in the face of an economy spiraling into the worst financial crisis since the Great Depression, when a collapse in the subprime mortgage market and deteriorating property values led to the forced sale of Bear Stearns Cos. and the demise of Lehman.
Mortgage financiers Fannie Mae and Freddie Mac were placed into government conservatorship, insurer American International Group Inc. agreed to a U.S. takeover to avert collapse, Merrill Lynch & Co. was compelled to sell itself to Bank of America Corp. and automaker General Motors Corp. faced insolvency.
To bring down a jobless rate that eventually reached a peak of 10% in October 2009, the Fed cut its target rate for overnight loans between banks to a range of zero and 0.25% and started buying Treasuries and mortgage debt on Dec. 5, 2008.
Within the first 30 days of the program’s onset, yields on dollar-denominated corporate bonds dropped a percentage point to 9.8% on Jan. 5, 2009, Bank of America Merrill Lynch index data show. By the time the Fed started its second round of QE on Nov. 12, 2010, yields on the notes had plunged to 4.6%, less than half what they were two years earlier.
“It’s allowed companies such as ourselves to continue to access the capital markets,” Dan D’Arrigo, the executive vice president and chief financial officer of Las Vegas-based casino company MGM Resorts International, said in a Sept. 17 telephone interview. During the crisis, “we still had access but at much more costly rates to our company,” he said.
MGM, which runs the Bellagio and MGM Grand casinos, was able to lower its interest expenses by $230 million in December, to about $770 million annually, refinancing debt with $4 billion of loans and $1.25 billion of bonds, according to a Dec. 20 statement from the company.
As credit loosened, corporate yields plunged as low as 3.35% on May 2, from 9.76% at the end of 2008. Verizon has led $1.1 trillion of dollar-denominated issuance this year, on pace to surpass last year’s record $1.47 trillion, data compiled by Bloomberg show.
Refinancings have cut the amount of speculative-grade bonds and loans set to mature in 2014 to $43.7 billion, compared with $331.5 billion when the Fed started its QE program in 2008.