The Federal Reserve has been buying U.S. Treasury bonds and notes. The 16 primary dealers who work with the Fed are selling these bonds and notes to the Fed. In turn the Fed credits their balance sheets so they have more money to lend and therefore interest rates should drop.
Banks, on the other hand, worried about losses down the road, are gun shy about lending and are hoarding cash. Then you can add to this mix the Treasury's need to finance our budget deficit. As an example, last week the Fed sold $98 billion dollars of Treasury notes. That means the reverse was happening. The 16 primary dealers had to bid on the notes and pay the Treasury. This has the effect of taking money out of the banks and sending it back to the Treasury.
So we have a push and pull going on. The Fed sells notes. The Fed buys notes. So far the yield on the 10-year note has dropped from 3% to 2.459% on March 19.
The Fed's purpose for buying Treasuries is to keep mortgage rates low. However, that does not necessarily mean that consumers will rush out to buy homes.
Is the Fed's program working? Are mortgage rates coming down?
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