have been offered as explanations of this remarkable worldwide environment of low long - term interest rates. one prominent hypothesis is that the markets are signaling economic weakness. this is certainly a credible notion. but periodic signs of buoyancy in some areas of the global economy have not arrested the fall in rates. a second hypothesis involves the behavior of pension funds. as the inevitable increases in retirement populations approach, especially among developed countries, the underfunding of retirement plans has become a growing concern. pension funds and insurance companies, are being pressed to make significant additions to longer - term bond portfolios. this demand for increasingly longer - term obligations is evident in the favorable reception given the fifty - year - maturity bonds recently issued by france and the united kingdom. but world demographic trends are hardly news, and recent adjustments to funding shortfalls do not seem large enough to be more than a small part of a complete explanation. the heavy accumulation of u. s. treasury obligations by foreign monetary authorities is yet another hypothesis that has been offered. and, doubtless, those purchases have lowered long - term u. s. treasury rates. but, given the depth of the market for long - term treasury instruments, the federal reserve board staff estimates that the effect of foreign official purchases has been modest. furthermore, such purchases seem an implausible explanation of why yields on long - term non - u. s. sovereign debt instruments are so low. a final hypothesis takes as its starting point the breakup of the soviet union and the integration of china and india into the global trading market, developments that have permitted more of the world's lower - cost productive capacity to be tapped to satisfy global demands for goods and services. concurrently, greater integration of financial markets has meant that a larger share of the world's pool of savings is being deployed in cross - border financing of cost - reducing investments. the enlargement of global markets for goods, services, and finance has contributed importantly to the favorable inflation performance that we are witnessing in so many countries. that improved performance has doubtless contributed to lower inflation - related risk premiums, and the lowering of these premiums is reflected in significant declines in nominal and real long - term rates. although this explanation contributes to an understanding of the past decade, i do not believe it explains the decline of long - term interest rates over the past year despite rising short - term rates. * * * whatever the underlying causes, low risk - free long - term rates worldwide seem to be one factor

to $ 300 billion of longer - term treasury securities and raised the caps on other purchases to $ 200 billion for the direct debt of the housing - related gses and $ 1. 25 trillion for agency - guaranteed mortgage - backed securities. pools. actions by central banks augmented large fiscal stimulus packages in the united states, china, and a number of other countries. on february 10, treasury secretary geithner and the heads of the federal banking agencies unveiled the outlines of a new strategy for ensuring that banking institutions could continue to provide credit to households and businesses during the financial crisis. a central component of that strategy was the exercise that came to be known as the bank stress test. 11 under this initiative, the banking regulatory agencies undertook a forward - looking, simultaneous evaluation of the capital positions of 19 of the largest bank holding companies in the united states, with the treasury committing to provide public capital as needed. the goal of this supervisory assessment was to ensure that the equity capital held by these firms was sufficient – in both quantity and quality – to allow those institutions to withstand a worse - thanexpected macroeconomic environment over the subsequent two years and yet remain healthy and capable of lending to creditworthy borrowers. this exercise, unprecedented in scale and scope, was led by the federal reserve in cooperation with the office of the comptroller of the currency and the fdic. importantly, the agencies'report made public considerable information on the projected losses and revenues of the 19 firms, allowing private analysts to judge for themselves the credibility of the exercise. financial market participants responded favorably to the announcement of the results, and many of the tested banks were subsequently able to tap public capital markets. overall, the policy actions implemented in recent months have helped stabilize a number of key financial markets, both in the united states and abroad. short - term funding markets are functioning more normally, corporate bond issuance has been strong, and activity in some previously moribund securitization markets has picked up. stock prices have partially recovered, and u. s. mortgage rates have declined markedly since last fall. critically, fears of financial collapse have receded substantially. after contracting sharply over the past year, economic activity appears to be leveling out, both in the united states and abroad, and the prospects for a return to growth in the near term appear good. notwithstanding this noteworthy progress, critical challenges remain : strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to