Stocks sank and Treasuries strengthened following the Federal Reserve Board’s statement on its plans to keep rates low. The yield on the benchmark 10-year Treasury fell to a record low.
On Wednesday, a Federal Open Market Committee statement said that economic growth is still slow, unemployment remains high and the labor market will continue to be weak. In addition, investments in commercial real estate are waning and housing is still depressed.
“The committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the committee judges to be consistent with its dual mandate,” the statement said. “Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.”
By a vote of seven to three, the committee elected to purchase $400 billion in Treasury securities with maturities ranging from six years to 30 years and sell an equal amount of Treasuries that have remaining maturities of no more than three years. The plan to extend average maturities is projected to be completed by mid-2012. The move is expected to put downward pressure on longer-term rates.
The Fed also plans to support mortgage market conditions by reinvesting principal payments from agency debt and agency mortgage-backed securities investments into more agency MBS.
Following the Fed’s statement, stocks plummeted — sending the Dow Jones Industrial Average down more than 280 points to close at 11,124.
As investors fled equities, they moved into Treasury bonds, driving down the yield on the 10-year Treasury note to 1.88 percent from 1.95 percent on Tuesday, according to data from the Department of the Treasury.
It was the lowest yield on record for the 10-year Treasury based on data back to 1962.
Last Thursday, when Freddie Mac reported that the average 30-year mortgage rate reached an all-time low of 4.09 percent, the yield on the 10-year Treasury was 2.09 percent. The 21-basis-point decline since suggests that mortgage rates have more room to fall.
But the decline likely won’t be reflected in tomorrow’s survey from Freddie — which reports a weekly average. The seven-day average for the 10-year yield was 2.00 percent as of last Thursday. As of today, the seven-day average was 1.99 percent.
