“The Federal Open Market Committee (FOMC) held a two-day meeting on June 19th and 20th. At that meeting, FOMC members voted to keep the federal funds rate unchanged at the 0 to 0.25% range. The Committee anticipates that economic conditions ‘are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.’
“In addition to keeping rates near zero, FOMC members decided to extend the program nicknamed ‘operation twist’ through year end. The goal of operation twist is to extend the average maturity of portfolio holdings.
“To achieve this goal, the FOMC ‘intends to purchase Treasury securities with remaining maturities of six years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately three years or less.’ The Committee is also going to continue the existing policy of re-investing principal payments from their current holdings to maintain the current size of the portfolio. …
“U.S. Treasury interest rates remain near their lowest levels in history. The ten-year U.S. Treasury note spent most of the month of June bouncing back and forth between 1.55% and 1.70%. Near the end of June the U.S. Treasury auctioned seven-year U.S. Treasury notes at an all-time record low yield of 1.075%. It is an amazing fact that with the U.S. public debt approaching $16 trillion, investors’ appetite for U.S.-backed debt is so strong they will accept the lowest investment returns in history.
The ‘Fiscal Cliff’
“The current debt ceiling is $16.394 trillion. There is just over $600 billion remaining before the debt ceiling is reached. An extension of the debt limit before the November election is unlikely, though it is unclear if there is enough time to delay action until next year. In our view, a debt ceiling extension ought to be bundled into legislation which resolves the ‘fiscal cliff’ pending on January 1st, 2013. So far, there has been very little action in Congress to deal with these pending issues, and we do not expect much to be accomplished before the November election.
“Inflation expectations were mostly unchanged in June, and remain safely below the FOMC’s inflation rate target.”
Bob Brinker, Jr., Brinker Fixed Income Advi$or, July 2012