The past month has been rather lackluster as far as interest rates are concerned. A rather tight and well-defined range has controlled rates of late and the balancing act between European debt concerns and signs of economic improvement in the US continues. The 10-yr treasury bond continues to hover around a 2.0% yield and mortgage-backed securities prices have improved, while also bouncing around in a fairly tight range.
News of a new Greek bailout plan did little to shake the markets, at least in the first couple of days since the announcement. In exchange for $172 billion dollars – approximately $19 billion of which is due on March 20 in the next round of Greek debt repayment – Greece will implement additional austerity measures, including sharp cuts in civil service jobs, welfare programs, and the national minimum wage. Other specifics are still to be worked out but the Troika (the European Union, the European Central Bank, and the International Monetary Fund) charged with the approval of measures backing the bailout fund must agree to the Greek plan by February 15th to ensure Greece’s timely repayment in March.
On the home front, Bernanke continues push for maintaining historically low rates. During his testimony before the Senate Budget Committee, the Fed chairman reiterated his FOMC policy stance of aggressive accommodation through at least late 2014. While employment numbers have been more encouraging of late and other production measures have shown signs of improvement, Bernanke still points to the languishing housing market as reason enough to keep rates low. Without an improvement in housing, Bernanke sees a growth path that remains slow and spotty.
To that end, many are watching for another QE of sorts, most likely in the form of additional MBS purchases. To what extent the Fed is sacrificing its mandate to maintain a low level of inflation in favor of near-term growth is yet to be seen. But for the time being, it appears rates will remain low if the Fed chairman has his way.
