The Price of Treasuries Experiencing Rebound

When the Federal Reserve bought up $6.5 billion debt as part of its plan to buy back $300 billion, the prices of government bonds rebounded by a considerable margin.

There have been some fluctuations in prices on treasury yields, especially after the 10-year yield hit 4% recently. At the same time, the yields are maintaining levels well above their December lows. The link between mortgage rates and Treasuries explains the Federal Reserve’s desire to maintain low yields.

The $300 billion debt buyback was announced back in March and represented its “quantitative easing” program, a plan that was intended to stimulate both demands and lower rates.

One the recent buybacks scheduled would include a purchase of about $6.5 billion in debt that is set to mature between May 2012 and November 2013. This was followed by an undisclosed amount that is set to mature between May 2016 and May 2019.

All of this government spending is also mirrored in the government’s far-reaching effort to stabilize the economy in the throes of recession by a spending campaign of unprecedented proportions. Such stimulus plans must be funded through the government’s sales of record-level debt.

The issue of deficit spending as a method of resuscitating the economy has raised the specter of inflation. The devaluation of the dollar through too much money supply, in turn, will undermine the value of the Treasuries. The treasury bond is vulnerable to inflation since the principal investment is fixed, so the inflation will reduce the value of the asset, particularly over a long period of time.

Thankfully, a new government report quelled such inflation-focused fears. The Producer Price Index (PPI), a method of tracking changes in wholesale prices for domestic producers, increased by 0.2% back in May, a lower percentage than what was predicted. The PPI report offered evidence that fears of inflation are unwarranted.

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