Treasury Yields Flattened as Fed Fights to Cut Mortgage Rates

Bloomberg reports:

The Federal Reserve’s inability to narrow the gap between consumer borrowing costs and government interest rates is driving investors to the longest-maturity Treasuries.

Central bank officials say they may buy Treasury debt, which helps determine rates on everything from mortgages to auto loans, to prevent borrowing costs from rising and delaying the economic recovery. Speculation that the purchases will start within days helped spark a rally last week in debt due in 10 years or more, reversing the worst start since before 1986.

Even though the Fed cut its target rate for overnight loans between banks to as little as zero in December, 15-year, fixed- rate mortgages averaged 4.76 percent last week, 2.44 percentage points above 10-year Treasury yields. The difference averaged 0.88 percentage point in 2003, when the Fed reduced rates to 1 percent.

“There is no point in fighting the Fed,” said Piyush Goyal, an interest-rate derivatives strategist in New York at Barclays Capital Inc., one of the 17 primary dealers that trade directly with the central bank. “If for whatever possible reasons, 10-year and 30-year Treasury yields start rising, the Fed will come in and purchase these securities.”

Lending money (to the U.S. federal government for longer than 5 years) with these meager yields:isn't the wisest thing to do.