Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
In New York City, Off-Track Betting is closing up shop. OTB was the only bookie that ever managed to lose money, one of the denizens of its "parlors" observed to the New York Times. There's little doubt government would do any better in drugs, prostitution or loan-sharking. So if the public sector does such a lousy job running a vice operation, the continued opposition to a government takeover of health care is understandable.
Another government-run operation not doing too well these days is its manipulation of the government bond market, aka, QE2. In direct contradiction of the Federal Reserve's stated intent to lower the yields on Treasury notes, those interest rates have shot up since the central bank announced its intention to buy $600 billion of Uncle Sam's paper by mid-2011.
Given the contrary behavior of markets that the government tries to dominate, I would have preferred the Fed to announce a price-support program for gasoline. That way, prices at the pump surely would have plunged instead of rising about half a buck a gallon since the summer driving season ended.
The anomalous action of the Treasury market no doubt will be a provocative topic of conversation at Tuesday's meeting of the Federal Open Market Committee, the final get-together for the Fed's policy-setting panel for 2010. Fed watchers had expected this would be a fairly routine affair after the Nov. 2-3 meeting, when the FOMC hammered out and approved the plan for the $600 billion Treasury purchases. That decision seemed to have mapped out Fed policy at least through mid-2011.
Much has changed since then, however. The benchmark 10-year Treasury note yield increased nearly a full percentage point, from its low in early October to Thursday's intraday peak of 3.34%. Since late August, Fed Chairman Ben Bernanke and other officials were laying out the arguments for a second round of securities purchases to follow up the $1.7 trillion of mortgage, agency and Treasury buys starting in March 2009. Since the FOMC approved QE2 in early November, Treasury yields have moved steadily higher.
Mortgage interest rates have increased in tandem, with a conventional 30-year fixed-rate loan up to 4.61% in the latest Freddie Mac survey, up from a record low 4.17% less than a month ago. Sub-5% 30-year mortgages are getting more difficult to find in the past few days, which is deterring refinancings.
As often happens, a negative-feedback loop results from the Treasury market's impact on the mortgage market. As yields rise, mortgage bankers and investors in mortgage-backed securities hedge their positions by selling Treasuries, which puts upward pressure on note yields. That, in turn, pushes up mortgage rates, further exacerbating the effect. Sudden, sharp rises in rates, such as has been seen in the past couple of weeks, make this feedback effect even stronger.
If the Fed wants to dampen this rise, perhaps the FOMC could consider resuming purchases of mortgage-backed securities. Since August, the Fed has been replacing MBS paydowns with Treasury note purchases. It could simply replace the runoff of mortgages with new MBS purchases. That may have a more direct impact on the cost of home loans for Americans looking to buy homes or refinance. It is at least a topic worthy of discussion by the FOMC.
The withering criticism of QE2 from both abroad and in the U.S. surely will be a topic of conversation. If it is a part of the official proceeding of the FOMC, expect such terms as "clueless," as Germany's finance minister characterized Fed policy, to be redacted from the summary minutes of the meeting released in a few weeks.
What cannot be ignored is the nearly unprecedented torrent of criticism of Fed policy, which has been underscored by the bond market's contrary response of lifting yields in response to a policy that sought to do precisely the opposite.
Nevertheless, expect the FOMC to stay the course. Government policies don't change at the first sign of distress. It takes outright failure to switch courses. Just ask OTB.
Comments: E-mail: randall.forsyth@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Consensus earnings estimates on the financial-services firm are too low.
Public confidence requires a solid commitment for policies to hold.
The footwear and apparel giant has strong sales momentum.
Investors in the semiconductor company get a cheaply priced dividend stock that's exposed to a high-growth market.
With star radio host Howard Stern signing a five-year contract to stay with Sirius XM, the stock looks like a sound investment.
The outflow from paper money into hard assets will gain momentum.
The financial-services firm's productivity is rising.
Credit Suisse likes the exchanges CME Group and IntercontinentalExchange.
If President Obama's tax-cut compromise passes Congress, the investor class can breathe a sigh of relief, says Wall Street tax pro Bob Willens.
There could be even more upside if buyers pursue the surviving entities.
After selling common, Treasury may sell its out-of-the money warrants as in other TARP deals.
Allen F. Wise sold 106,000 shares as the managed-care firm sits near a year high.
After gaining 40% in three months, the chip giant's stock looks set to cool off, especially as fundamentals remain shaky.
An accelerated-depreciation would benefit WMS Industries and Bally Tech.
Bond investors got a shock this week. What to do now. (At SmartMoney.com.)
How Bill Gates is reshaping philanthropy. Plus, the Amazing Bicycle Man.
Bill and Melinda Gates -- Effective Philanthropists
For more Penta features on leading private banks, values on the ski slopes, best in private dining rooms and ways to beat the taxman.
Should you believe the euphemists who say the jobs report is not so bad? Plus, guess who feasted on that trillion-dollar care package in 2008?
Whirlpool deserves more respect for its strength in emerging markets and operating improvements at home. Why it's time to rinse away the doubts.
There's a little price trouble brewing in its Folgers coffee business, but overall the outlook for the company is very positive.
Smucker's Stock: Lip-Smacking
As the guerilla warfare in Colombia has subsided, the country has been able to produce more oil than ever before. Here are two major beneficiaries.
Read Full Article »