NEW YORK – With bond yields and mortgage rates reaching record lows, the efforts of the U.S. Federal Reserve (Fed) to extend the life of the Operation Twist will probably not work to reduce U.S. interest rates.
Still under the status quo, debtors, including the U.S. government itself, continue to enjoy cheap credit. While savers, especially older Americans living on fixed incomes, will continue to suffer with low interests incomes.
“Savers are suffering and borrowers are benefiting,” said Michelle Meyer of Operation Twist, economist at Bank of America in New York.
The second stage of Operation Twist began last July 3. It involved the Fed purchasing Treasury bonds with proceeds from sales of short-term debts.
The first program ended last week.
While short term interest rates rose slightly this year, long term rates for bank accounts and money market funds were not modified.
These funds continue to pay rates just above zero which fail to compensate for inflation. Last May, it hovered around 1.7% annually.
The rise in short-term rates increased borrowing costs for banks. Their revenues depended on the interests of bonds and other investments.Costs of short-term debt also rose with Operation Twist because there was a greater supply of Treasuries in the short term on the open market. Some were deposited in banks on Wall Street, raising the demand for debt financing until the banks are resold to investors.
Banks and Wall Street firms raise money from short-term financing market which in turn, make loans for long-term investments more profitable.
“The flatter yield curve is marginally worse for the banks,” said Meyer, of Bank of America.
The net interest margin of banks, what they earn on their loans and securities and what they pay for deposits and other loans, suffered setbacks in this climate of reduced rates.