Longer-Dated Treasury Issues May Bear Brunt of a Rate Cut
So-called safe-harbor flows have meant strong currents for the U.S. Treasurys market throughout the credit-market shakeout.</br></br>Now it looks like their absence could leave investors flailing. The Federal Reserve's efforts to keep cash moving in the financial system have stopped short of the sort of interest-rate cut the market craves, but they have weighed on Treasurys nevertheless. The question is how much government bonds will suffer from any turnaround in the credit and stock markets.</br></br>Friday, the Fed cut the borrowing rate on its discount window to 5.75% and extended the term from overnight to 30 days, with the option to renew. The central bank left the key federal-funds rate untouched at 5.25%.</br></br>It was enough to prompt a significant drop in prices of long-dated Treasurys. The benchmark 10-year note fell 19/32 point, lifting its yield to 4.673%, as debt prices and yields move inversely. At the same time, the Dow Jones Industrial Average surged 1.8%.</br></br>The feeling in the market now is that it isn't so much a question of whether the Fed will cut the fed-funds rate, but when it will do so. According to Credit Suisse, it is a matter of strategy alone; an early cut risks overstepping the mark and forcing an adjustment down the line, with all the attendant volatility and potential damage to the bank's credibility. If credit markets stabilize, the Fed can bide its time and take a more measured approach.