“What’s causing our current low interest rates, QE forever and, really, a global malaise, could change very quickly,” Prudential’s Nicholas Silitch said today at a conference sponsored by KPMG International in New York.
The central bank said last week it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a bid to cut unemployment. The yield on the 10-year Treasury has dropped to 1.78 percent from 3.29 percent at the end of 2010.
The decline in rates has increased the value of longer-term bond holdings, benefiting the balance sheet of Prudential, the second-largest U.S. life insurer, while pressuring interest income. The Newark, New Jersey-based insurer had more than $260 billion in fixed-maturity investments as of June 30, including almost $13 billion in commercial mortgage-backed securities.
Federal Reserve Bank of Dallas President Richard Fisher said yesterday that the third round of bond purchases may risk higher inflation. Fisher, who doesn’t vote on monetary policy this year, opposed the Federal Open Market Committee decision last week for a new round of quantitative easing.
The five-year, five-year forward break-even rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC decided on QE3. That was up half a percentage point from July 26. It dropped to 2.80 percent on Sept. 17.
“You could have a very quick spike up in rates,” he said. “It would be good for us in many ways, but it could degrade asset values such as commercial real estate.”
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