Turning the screws

22 September 2011 By Antony Currie Follow @AntonyMCurrie

Extra stimulus pushed 10-year Treasury yields to a new low and could leave them under 2 pct for a while. That doesn’t just crimp interest margins for retail banks; it also squeezes already struggling debt traders. Financials now look nothing but a super-long-term investment.

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The yield on the benchmark 10-year U.S. Treasury bond hit a new low of 1.728 percent on Sept. 22 as markets reacted to the decision a day earlier by the U.S. Federal Reserve to initiate Operation Twist. Under the plan, the central bank will purchase $400 billion of longer-term U.S. government debt on its balance sheet and sell the same amount of debt maturing in three years or less.

Bank stocks slumped in trading on Sept. 22, led by Morgan Stanley , whose shares fell as much as 10 percent. Those of Bank of America , Citigroup , JPMorgan and Goldman Sachs all declined by at least 5 percent by mid-afternoon.

Moody’s Investors Service on Sept. 21 downgraded Citigroup’s short-term credit rating, Wells Fargo’s long-term credit rating and Bank of America’s holding company short and long-term credit ratings, stating that it “believes there in an increased possibility that the government might allow a large financial institution to fail.”

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