Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

Figure 2. Selected interest rates, 2002-08. Data plotted as curves. Two panels. In the top panel, the interest rate on 10-year Treasury securities begins at about 5 percent in January 2002 and then drifts downward, on balance, to a low of about 3.5 percent in mid-2003. It then rises gradually, on balance, to a little over 5 percent in June 2006 before moving back down throughout 2007 and the beginning of 2008, reaching about 3.5 percent in March 2008. The target federal funds rate starts at 1.75 percent at the beginning of 2002 and steps down to reach 1.25 percent at the end of 2002 and then to 1 percent at the end of 2003. It stays at that rate until July 2004, when it begins to rise steadily to reach 5.25 percent in July 2006, where it remains through August 2007. The target federal funds rate then declines about 0.25 percent for each month following until February 2008, when it declines a full percentage point, ending at about 2.7 percent in March 2008. In the bottom panel, the interest rate on high-yield bonds starts at about 12.5 percent in the beginning of 2002, slips slightly, then rises to 14 percent in October 2002. It then drops to about 8 percent by the end of 2003, remaining in a narrow range around 7.7 percent through March 2007, rising again through the rest of 2007, with a small 0.5 percentage point dip in the early fall, and then finishing at about 10.9 percent in March 2008. The interest rate on Moody's Baa corporate bonds begins at about 8 percent in 2002 and then drifts downward, on balance, to reach about 6 percent in January 2005. It remains at about that level through September 2005. The rate then rises, on balance, to almost 6.8 percent in July 2006, falling back to 6.3 percent in March 2007, rising again 0.3 percent in August 2007, falling 0.3 percent by November 2007, and finishing in March 2008 at about 6.9 percent. The interest rate on 30-year fixed-rate mortgages begins at about 7 percent in 2002 and remains at about that level for a few months before it declines to reach a low of about 5.25 percent in mid-2003 and then moves in a range between about 5.5 percent and about 6 percent for the next two years. From about 5.5 percent in mid-2005, it rises, on balance, to almost 6.8 percent in mid-2006 before dropping back to 6.2 percent by early 2007, then rising again to 6.7 percent by July 2007, falling steadily to about 5.75 percent in January 2008, and rising a touch in the next few months to finish at about 6 percent in March 2008.

Note: The data are monthly and extend through March 2008.

Source: For Treasury securities, mortgages, and Moody's corporate bonds, Federal Reserve Board, Statistical Release H.15, "Selected Interest Rates"; for federal funds, Federal Reserve Board; for high-yield bonds, Merrill Lynch Master II index.