"10-Year Treasury Rate - Will QE2 Work?"
The Federal Reserve’s program to purchase $600 billion of government securities – a strategy called quantitative easing – has been subjected to an unprecedented level of criticism from some politicians and economists, U.S. trading partners and even a few senior Fed officials. By purchasing government securities, the Fed is injecting more credit into the economy and hoping to reduce long-term interest rates. The goal is to encourage more borrowing, risk-taking and, ultimately, hiring. The side-effect is a weaker dollar, which will boost U.S. exports but increase the price of imports, upsetting our trading partners. The strategy has been called “QE2” because the Fed tried this before, purchasing $1.6 trillion of mortgage-backed and Treasury securities from November 2008 until March 2010, which helped unfreeze the credit markets. The commercial real estate industry has a stake in the debate because, if the strategy works as advertised, lower interest rates would make mortgages cheaper and make the returns from commercial real estate look better compared with the slim yields on government bonds and other fixed-income assets that move in tandem. Moreover, the hoped-for increase in borrowing, risk-taking and hiring should translate into at least some added occupier demand across all property sectors. But there is downside risk; critics assert that QE2 perversely could result in higher interest rates if investors lose faith in the dollar and the ability of the U.S. government to manage its debt. Others doubt that the strategy will have much stimulative effect at all given that interest rates already are very low. Given the high stakes, will QE2 work? The 10-year Treasury yield declined in August and stayed low through the fall as Fed officials publicly discussed the plan, suggesting it was having an impact. Then yields increased in mid-November when the backlash against the strategy gained momentum. QE2 is likely to keep interest rates lower than they might otherwise be, but the very public criticism could limit the benefits if investors lose confidence in the efficacy of the program and the Fed's ability to carry it out.
Source: Federal Reserve, Grubb & Ellis