The Federal Reserve yesterday stunned markets by announcing its intention to buy $300bn of long-term US government securities and another $850bn of securities issued by Fannie Mae and Freddie Mac.
The aggressive moves caught investors unprepared. Government bonds soared with the yield on the 10-year paper, which was already down 6 basis points, falling another 45 basis points to 2.51 per cent. The Dow Jones, which had been down about 60 points prior to the Fed's statement was 100 points higher within minutes of the news crossing the wires.
The US central bank had discussed the possibility of buying Treasuries before, but had appeared to back away from the idea in recent weeks. The bank explained it was buying Treasuries as an indirect way of lowering private borrowing rates. It hopes the massive purchases of mortgage-related securities will lower mortgage rates, allowing households to refinance at lower rates, and easing pressure on the battered housing market.