Fed's move into Treasurys has long tentacles
Rates should fall on consumer, business loans -- but not credit cards

"It's very significant because it means that the whole level of the yield curve will shift down -- any private rate that's priced off Treasurys will be affected," said Torsten Slok, senior economist at Deutsche Bank.

On Wednesday, the Fed surprised markets by saying it would buy up to $300 billion in Treasurys, concentrating on two-year to 10-year debt, and would purchase an additional $750 billion in mortgage-backed securities guaranteed by federal mortgage agencies such as Fannie Mae (FNM:

1.10, +0.30,+37.5%) and Freddie Mac (FRE:

1.15, +0.33, +40.2%) .

That expansion brings its purchase plans in mortgage-backed securities to up to $1.25 trillion this year. It will also double its purchases of debt issued directly by the agencies to $200 billion. Read more on the Fed.

Analysts had not expected the Fed to plunge into the Treasury market so soon. Many had expected the Fed to expand its program of buying mortgage bonds, saying extending the program was necessary to hold conventional mortgage rates down. But they had not anticipated such a large expansion. Read more on mortgages.

The announcement Wednesday afternoon sent Treasury prices soaring, reducing yields on the benchmark 10-year Treasury note by a half percentage point -- the largest drop since the October stock market crash of 1987. Read bond report.

Bonds issued by Fannie Mae and Freddie Mac also rallied sharply, pushing yields lower. Rates on these agency bonds are also instrumental in setting mortgage rates.

The huge rally in Treasurys -- and its corollary wipe-out in yields -- should lower interest and borrowing rates that are directly pegged to Treasury yields, such as some mortgages and corporate loans.

"People in the market for a jumbo mortgage loan might see rates drop slightly," said Greg McBride, senior financial analyst at Bankrate.com.

"As with other forms of long-term debt, fixed-rate jumbo mortgages are priced at a spread above risk-free Treasury securities. If you reduce the yield on Treasurys, that helps bring down borrowing costs for corporations and consumers alike," he said.

He doesn't see much of a help to rates consumers pay on credit-card loans, however, because those rates are pegged to shorter-term instruments.

Corporate borrowers could be in luck, however. The depression in yields is likely to push investors away from Treasurys and into other assets, such as corporate bonds. Higher demand for this debt should drive down the rates corporations have to pay to issue bonds, says Federated Investors' portfolio manager Don Ellenberger.

"The Fed isn't buying Treasurys in order to lower Treasury yields, but in the hope it will have knock-on effect of lowering other types of interest rates in the economy to benefit consumers and businesses," said Ellenberger, who helps manage $8 billion in fixed-income assets.

"Treasury rates, as they go down, become less and less attractive relative to other U.S. securities ... then the attraction of buying a corporate bond increases," he said.