Not All Interest Rates are Falling

While the purpose of the Fed's Operation Twist program is to lower long term interest rates, the reality is that the only long-term rates that are falling are Treasury rates.  In the chart below, we compare the change in the yield on the 10-year US Treasury to the change in High Yield Credit Spreads (spread between junk rated bond yields and 10-year US Treasury).  As shown in the chart, although Treasury yields are falling, spreads on high yield debt are rising at just as fast, if not a faster, rate.

In order to get an idea of how high yield bonds are trading, in the chart below we have added the spread on high yield bonds to the yield of 10-year US Treasuries.  In early August, spreads blew out just as the US saw its AAA credit rating cut by S&P.  Since then, spreads have been essentially range bound at around 9.5%.  That is until the last week.  Coincidentally, just as Operation Twist was formally announced, yields on high yield debt actually broke out of their recent range and are now approaching 10%.  If the Fed's intention is to lower overall long-term interest rates instead of just Treasury yields, as of now, it isn't working.

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