In an exclusive interview with today's Guardian, Alastair Darling revealed the government would soon issue proposals to boost the supply of long-term fixed-rate home loans, amid concerns lenders were offering only shorter-term mortgages so they could repeatedly charge high arrangement fees.
This new diminished supply of shorter-term securities should add extra downward pressure on these Treasury rates this year.
It was also helped by the dwindling supply of longer-term securities, after the Treasury cut its sales.
Lengthening the average maturity of the Fed's $2.65 trillion portfolio reduces the supply of long-term bonds, nudging down yields.Politicians have long bashed central bankers.
Despite ministers planning to boost the supply of long-term fixed rate loans, new data from the Council of Mortgage Lenders (CML) shows that first-time buyers and home movers still favour short-term mortgage products.
Second, by reducing the supply of long-term bonds, it can force investors who want long-duration assets to accept a lower return on the smaller supply of those still available.
He added that the supply of long-term bonds would increase, driving down their prices, as new tax cuts and higher spending burdened the federal government with more debt.
No one is expecting the shrinking supply of longer-term Treasury bonds to bring cataclysmic changes, but there will be important effects for investors holding or interested in domestic taxable bond funds.
As the usage of this rising supply of money, termed its "velocity," also continues to recover from last year's collapse, the economy gets a double boost that further elevates economic activity.
Or, to put it another way, by reducing the supply of long-term debt in the financial system, the Bank hopes to drive up the value of the remaining long-term debts, which is mechanically the same thing as driving down the "yield" or interest rate on such long-term debts.
