Fed's Policies Backfire

The "winds [have] turned against the Fed in recent days, as investors worry the government's approach could lead to inflation." Or so says the Wall Street Journal, which leads with a look at how a recent surge in Treasury yields and mortgage rates signals trouble for the Federal Reserve's effort to keep the cost of borrowing at bay. Yield on the benchmark 10-year bond rose to 3.69 percent Wednesday. The gap between yields on two-year Treasury notes and 10-year notes, known as the yield curve, the WSJ explains, widened to 2.75 percentage points—its highest ever. Treasuries sold off following an announcement that the government had received "relatively healthy demand" for the $35 billion worth of five-year notes issued Wednesday, as investors concluded that strong demand for short-term U.S. debt meant there'll be fewer buyers for longer-term bonds, CNNMoney reports.

For long-term interest rates to stay in check, the "Federal Reserve and European Central Bank officials must persuade investors that they have an exit strategy from policies that have chopped interest rates and flooded financial markets with dollars and euros," Reuters concludes in the third installment of a three-part series on the global economic outlook. "Traditional inflation harbingers like a steeper government debt yield curve and rising gold prices have flashed warning signals, while a weaker U.S. dollar and near doubling in oil prices since January have also got people worried," it says.  

The rise in the 10-year bond's yield also stoked concerns that mortgage rates, which are tied to the 10-year yield, could climb, hampering a recovery in the housing market, which is seen as a "linchpin" of an overall economic recovery. "The yield on mortgage-backed securities over comparable Treasury bonds widened Wednesday to 1.59 percentage points, from 1.38 percentage points Tuesday. ... That's the market's biggest sell-off since November," the Journal notes. Stocks also slipped yesterday, with the Dow Jones Industrial Average falling 173 points, or 2 percent, to 8,300. The S&P 500 lost 17 points, or 1.9 percent. The Nasdaq composite dropped 1.1 percent, losing 19 points.

The New York Times leads its business news with a look at Chrysler's challenges as it emerges from a "lightening-quick" bankruptcy, perhaps as early as next week, writing that "competing in a brutal marketplace ... may make bankruptcy court seem, by comparison, like a refuge." On the upside, Chrysler will have lower labor costs, less debt, and Fiat on its side, but consumers, it says, aren't in the mood for much consuming. What's more, those who are in the "car-buying mood" are avoiding Chrysler as its product line is dominated by pickups, minivans, and sport utility vehicles—all of which have "fallen out of favor with fuel-conscious consumers." And even though Fiat has said it plans to add smaller, sporty cars to Chrysler's lineup, they won't hit the market for another couple of years. So Chrysler will have to subsist on the $7 billion it is getting from the Treasury Department "until the Fiat alliance starts paying off." But analysts say Chrysler, with its reorganization and lighter, more efficient model, does have a chance to become competitive ... eventually.

For German carmaker Opel, things are looking equally uncertain. Reuters reports that German ministers emerged from a 12-hour discussion unable to reach a deal to provide Opel, which is owned by General Motors (GM), with temporary financing if GM files for bankruptcy. And if anyone is to blame, they said, it is the U.S. Treasury. "We have made demands on the U.S. Treasury and expect answers by Friday, and we will need these answers in order to agree a plan," Germany's economy minister, Karl-Theodor zu Guttenberg, said. Also, Italian carmaker Fiat and Canadian-Austrian auto-parts supplier Magna have emerged as Opel's final suitors, beating out Belgium's RHJ International SA. China's Beijing Automotive Industry Corp. could return with a more detailed offer, according to Reuters.

And it's curtains down for hedge fund Pequot Capital as the Securities and Exchange Commission has revived an insider-trading probe that at one point looped in Morgan Stanley (MS) Chief Executive John Mack. The once $15 billion fund, founded by legendary hedge fund manager Arthur Samburg, has faced difficulties in the past few years amid an "on-again, off-again investigation" that includes "allegations that [Samberg] may have engaged in insider trading in Microsoft Corp. (MSFT) stock with the help of one of his then employees, who joined Pequot from the software giant," the WSJ reports. In a letter to investors sent late yesterday afternoon, Samburg wrote: "Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction." He said the situation had become "increasingly untenable" for the firm and for himself, concluding, "Pequot can no longer stay in business." Investors should be mostly cashed out by June.

According to Bloomberg, which cites a May 15 regulatory filing, Pequot oversees $3.47 billion, down from $4.3 billion in November. In 2001, when it ran $15 billion, Pequot was the top-ranked hedge fund firm by assets. Samburg has denied any wrongdoing.