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QE2 question

January 23rd, 2011, 12:31 pm

I recently came upon a NYTimes article that contained the following quote:QuoteWhen devising the program, Mr. Frost and his team decided to focus most on buying Treasury notes with an average maturity of five to six years. That is because the yields on these notes have the biggest impact on interest rates for mortgage holders, consumers and companies issuing debt, and on banks? decisions to lend to businesses. Over the weeks and months of the program, his purchases should drive up the prices of these securities because they will be in greater demand and consequently push down their yields.Does anyone know where I can find information/resources about why 5-6 year maturity Treasuries "have the biggest impact on interest rates for mortgage holders, consumers and companies issuing debt, and on banks' decisions to lend to businesses?" As opposed to those with 4 or 7 year maturity?
Last edited by mmautner on January 22nd, 2011, 11:00 pm, edited 1 time in total.
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QE2 question

January 23rd, 2011, 3:11 pm

I am not sure that the statement is correct. It is hard for me to see how t-bills impact consumer loans as banks do not get funding from t-bills. my car loan is quoted in LIOBOR + spread, not the treasury rate.
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QE2 question

January 24th, 2011, 9:42 pm

5yr is the liquid point on the curve, the other being 2yr and 10yr. swaps/libor spreads price off treasury yields. a typical mortgage bond has, due to prepayment optionality, the highest sensitivity around the 5yr point on the curve, even though the stated maturity is much longer. so to impact mortgage bond prices/rates, the FED wants to target this point. and they buy 5y tsys because that is the most atomic part in the whole puzzle.personally, i think they should just buy the mortgage bonds. I think they will do it for QE3.
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QE2 question

January 26th, 2011, 2:29 am

mmautner, I'm relatively new at this, but I believe the reason for the 5 to 6 year maturity focus is because the average 30 year loan is refinanced in 5 to 6 years (as of the last 10 or so years) so this is what the rate for 30 year mortgages is based on. Thus if you lower the 5 to 6 yr yield, all loans that are based off it (most importantly residential mortgages) will also see lower interest rates. From my limited understanding the entire point of QE2 was the force a large bond sell-off, support the housing market and drive up the price of anything that isn't nailed down.