Forget QE3 -- The Fed Needs to Help the Mortgage Market

NEW YORK (TheStreet) -- Yields are too low for another quantitative easing initiative. Federal Reserve policy actions QE1, QE2 and Operation Twist were designed to bring down long-term interest rates.

With the yields on the 10- and 30-Year Treasuries at record lows of 1.439% and 2.508%, respectively, on Friday, the Fed already has the U.S. economy and markets turning Japanese.

Compare those yields to Japanese bonds. The 10- and 30-year Japanese government bond yields are 0.82% and 1.78%, respectively.

It's important to note where the Japanese stock market is vs. where it was in the late 1980s and early 1990s.

But before I discuss stock markets, let's compare the trends in 10-year yields here and in Japan.

The weekly chart below shows the yield on the 10-year Treasury. This yield began to decline from 5.25% in mid-2007 after the Fed's final rate hike, which pushed the federal funds rate up to 5.25%.

Since then, the decline in yield has been dramatic, and last Friday the 10-year yield reached another all-time low at 1.439%.

Once the Fed began to cut rates in September 2007 the yield decline accelerated.

On Dec. 16, 2008 the Fed cut the federal funds rate to zero to 0.25%, and that's where it has been ever since without a major positive effect on the Main Street economy.

The 10-year yield rose from about 2.00% then to 4.00%, where buyers emerged.

Note how the 200-week simple moving average has been a major support for this yield since 2010.

Chart Courtesy of Thomson/Reuters

Throughout this downward trend in yields most economists, strategists and folks in the media was calling this a "bond bubble," saying that Treasuries would not perform as well as stocks and that locking up a Treasury at these low yields would be dead money.

Theses premises were dead wrong. If you bought a 10-year note five years ago, you would be half way through to maturity earning about 5% a year with a huge capital gain.

More importantly, you do not have to hold a Treasury note or bond to maturity. You can trade them like stocks. Investors that missed this bond rally will likely get hurt in equities.

The above graph of the Japanese 10-year government bond shows a yield pattern very similar to that for the U.S. 10-year note.