Money Rates Rising Signals Treasury Losses as Fed Prepares Exit

Money market interest rates at five-month highs show the Federal Reserve is laying the groundwork to siphon a record $1 trillion in excess cash from the banking system and sending a bearish signal on Treasuries.

Overnight federal funds rates rose to the highest since September and the cost to dealers to borrow and lend U.S. securities for one day more than doubled in the past month. Three-month Treasury bill rates rose last week to the highest since August.

The rise is a sign traders are preparing for tighter monetary policy as stimulus measures end. In the three months before the Fed started raising borrowing costs in June 2004, 10- year Treasury yields rose about 0.75 percentage point as bond prices fell. While higher rates mean increased borrowing costs for President Barack Obama, they also show growing confidence that the economic recovery is gaining traction. (more)