Rising bond yields present fresh Fed challengehttp://www.ft.com/cms/s/0/ee63f0da-34dc-11de-940a-00144feabdc0,Authorised=true.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fee63f0da-34dc-11de-940a-00144feabdc0%2CAuthorised%3Dtrue.html%3F_i_location%3Dhttp%253A%252F%252Fwww.ft.com%252Fcms%252Fs%252F0%252Fee63f0da-34dc-11de-940a-00144feabdc0%252CAuthorised%253Dtrue.html">Ft.com
After rising steadily in recent weeks, yields on US Treasuries have this week finally climbed back above the levels at which they were trading before the Federal Reserve started buying US debt a month ago.
The ability of the Fed to balance the records amounts of new debt the US government has to sell – supply pressure which tends to raise interest rates – with its desire to keep interest rates low enough to spur fresh lending and mortgage financing continues to drive the Treasury market.
Yields on 10-year US Treasury debt on Wednesday traded above 3.00 per cent, compared with a low of 2.54 per cent on March 18 just after the Fed had announced it was planning to buy long-term debt. The 30-year US Treasury bond yield hit 3.92 per cent, above the 3.8 per cent before “quantitative easing” was introduced.
“It’s all about the market’s testing of the Fed’s resolve to keep yields low,” said Carl Lantz, interest rate strategist at Credit Suisse. “The markets are waiting to see whether the Fed will keep surprising them in ways that could push yields lower.” Such surprises could involve a bigger direct purchases, or buying larger chunks of debt at once, he said.
The $300bn Treasuries purchase plan announced at last month’s Federal Open Market Committee meeting marked the first time in decades that the Fed had committed to buy long-term US debt. The amount may be increased, especially if pressure on yields continues to rise. The large initial impact of the move has been wiped out, partly because of concerns over the scale of the debt issuance needed to fund massive US fiscal stimulus and bank bail-out programmes. However, given the sharp rally in equity markets since early March – the S&P 500 index is up more than 25 per cent – yields would probably have risen much more without the Fed’s intervention.
Fed analysts suggested the $300bn purchase would reduce the yield on 10-year Treasuries by 25-35 basis points. Officials think the rate today is much lower than it would have been if they had not started buying.
“For yields to reverse their natural course, not only does the Fed have to step up purchase of long-term Treasuries and agencies, but bond traders will have to be convinced that such actions are sufficient in capping bond yields,” said Ashraf Laidi, chief market strategist at CMC Markets. He said the rise of the 10-year yield above 3 per cent “signals bond traders’ constant challenging of the Fed”.
The importance of supply issues was clear in the 30-year yield’s moves this week. The yield rose partly in anticipation of increased sales of 30-year bonds. On Wednesday, the Fed said it would increase the frequency of its 30-year bond sales to monthly, part of a plan to meet an estimated $1,600bn to $2,700bn of new borrowing needs.
Minutes of the meeting of the Treasury Borrowing Advisory Committee showed that members discussed adding new maturities to the Treasury market. “Several members stated that Treasury may need to consider this alternative, but should begin with a second reopening of the 30-year bond and monitor developments in the long end of the curve,” the minutes said.