In a major policy shift, the US Federal Reserve ended its purchase of $300 billion dollars of treasury securities.The purchase had the effect of pumping money into the banking system. When the Fed buys securities, it creates a credit on bank balance sheets, thus increasing the banks' ability to lend.
Fed purchases helped to keep interest rates from rising i.e. the yield on the benchmark 10-year note never went above 4%.
At the same time the Fed issued a record $1.25 trillion dollars in treasury notes and bonds, more than double a year ago's auctions. The purchases acted as a cushion for keeping borrowing costs down.
This move coincided with good news on the housing front with sales of existing of US existing homes surging 9.4% in September. Mortgage rates averaged 5% during the current week, down from 6.63% a year ago.
Corporate yields also fell to an average of 5.9% from 10.3% in March In addition the Commerce Department said that the US economy grew at a 3.5% pace in the past quarter.
US treasury auctions are going well given the record amount of debt offered. Last week, $41 billion of five year notes were offered with the "bid to cover" ratio at 2.63. This means that there were 2.63 times the bids for the securities offered. This ratio is the highest since 2007, again another stunning success.
One growing problem on the horizon is that the Fed has to increase treasury offerings to $2.38 trillion dollars in the year starting October 1, up from $1.81 trillion in the past 12 months.
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