Markets: News  

The Treasury won't do the twist

PORT WASHINGTON, N.Y. (MarketWatch) -- The Federal Reserve's latest efforts to push long term interest rates down is running up against the Treasury's attempt to lock in today's historically low borrowing costs.

Right now, the central bank is trying to twist long term rates lower by selling Treasury bills from its portfolio and buying Treasury bonds from the open market.

It expects the relative scarcity of long bonds to push up their prices, hence lowering their yields. In turn, this is supposed to encourage borrowing and investing in stocks, thus jump-starting the economy through increased spending and the wealth effect.

However, this program is running up against an opposite and equal force – the United States Treasury.

The chief fund-raiser for the government, the Treasury is selling fewer bills, while offering more bonds. Its purpose is to lower the government's interest expense, lock in today's low rates and save the taxpayer some money.

Call it the irresistible force meeting the immovable object.

By selling long bonds, the Treasury is trying to lengthen the maturity of its debt, now 64 months, and the highest in a decade. Meanwhile the Fed is trying to lower borrowing costs by taking these same securities off the market.

A Treasury spokesman says that the Treasury has no plans to abandon its program of financing the government at the lowest possible cost. If this is true, it will keep the yield curve from twisting the way the Fed wants, since greater supply will put downward pressure on prices, thus jacking up yields.

When all this is combined with the relatively small amount of money the Fed says it will use during the extension of Operation Twist, it suggests that the central bank's efforts will likely come a cropper. In other words, there will be little or no discernible reduction in long-term interest rates, this time around.

This is just as well, since the level of interest rates is not the reason for this economy's lack of growth.

People are deleveraging, boosting their savings, and in many instances, lack the confidence to borrow. For their part, many firms are sitting on mountains of cash. As for the banks, they are still parsimonious, when it comes to making loans.

What Fed head Ben Bernanke needs is a little help from his friends. I am referring to those who inhabit both ends of Pennsylvania Ave. in Washington.

The pols need to end the uncertainties that worry business and consumers. The fog surrounding the fiscal cliff and the lifting the debt ceiling, among other things, is keeping companies from hiring and consumers from spending.

Washington's pols must favor growth over austerity and leave deficit reduction for another day. Hopefully they can convince their counterparts in Europe to do the same, thus eliminating another worry, Europe's debt crisis.

In short, there's too much "my way or the highway" inside the Beltway and not enough friendly persuasion. The late Rodney King was on to something when he said "Can't we all just get along?"