What To Expect From Greenspan On Tuesday
Tomorrow, Alan Greenspan will give his semi-annual testimony about the state
of US economy to Congress, and although his choice of words will most likely
have the greatest immediate impact on the Treasury market, participants in all
markets should be aware of what’s at stake here.
On June 20–the Friday before the last FOMC meeting–the Federal Reserve
released a study examining the role that statements by Federal Reserve
officials have in shaping investor expectations of interest rates. Not
surprisingly, the study concluded that statements by the Fed indeed ‘have had
a considerable influence on short and intermediate-term interest rates. It is
no coincidence that the Fed released this study two days before the last
policy meeting. The reason is that after thirteen rate cuts since 2000, the
Fed has basically run out of ammunition in its short-term rate arsenal and is
increasingly relying on longer-term rates to effect monetary policy.Â
It is no secret to anyone that lower long-term rates have been the lifeline to
the US economy.
How Consumers Benefit
Because mortgage rates are closely tied to the performance of the Ten Year
Treasury, lower yields have been a boon for the housing market and consumer
balance sheets. .Â
How Businesses Benefit
Lower Treasury yields (remember yields and price are inversely related) have
lowered corporate America’s cost of capital, which has enabled companies to
lower their debt servicing costs and finance any new business endeavors at
lower levels. Most recently, businesses with under funded pensions,
such as GM
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PowerRating), have taken advantage of the low borrowing costs by
issuing bonds in order to cover their pre-existing shortfalls. Moreover, the
recently hot small-cap growth sector has benefited immensely from the low
interest rate value in investor valuation models. Â
Much to Mr. Greenspan’s chagrin, however, yields have risen substantially and
the curve has steepened since the FOMC cut rates last month. In fact, the
yield on the Ten Year Treasury
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PowerRating) has erased virtually all of the
gains it made in May and June, and it is now within striking distance of its
200 day moving average–as can be witnessed in the chart below).
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Tomorrow, we can expect that Mr. Greenspan will attempt to finesse the bond market by
indicating that the current lack of inflation will allow the Fed to keep
interest rates low for an extended period of time. However, the markets
shouldn’t expect any mention that the Fed will resort to buying Treasuries outright , as this is Mr. Greenspan’s last line of defense and would most likely
happen if the 10 Year were to rise above the 4.5% level over the short-term.