June 27 (Bloomberg) -- The Federal Reserve will remain the
biggest buyer of Treasuries, even after the second round of
quantitative easing ends this week, as the central bank uses its
$2.86 trillion balance sheet to keep interest rates low.
While the $600 billion purchase program, known as QE2,
winds down, the Fed said June 22 that it will continue to buy
Treasuries with proceeds from the maturing debt it currently
owns. That could mean purchases of as much as $300 billion of
government debt over the next 12 months without adding money to
the financial system.
The central bank, which injected $2.3 trillion into the
financial system after the collapse of Lehman Brothers Holdings
Inc. in September 2008, will keep buying Treasuries to keep
market rates down as the economy slows. The purchases are
supporting demand at bond auctions while President Barack Obama
and Republicans in Congress struggle to close the gap between
federal spending and income by between $2 trillion and $4
trillion.
“I don’t think the Fed wants to remove accommodation in
any way, shape or form,” said Matt Toms, the head of U.S.
public fixed-income investments at Atlanta-based ING Investment
Management, which oversees more than $500 billion. “It’s quite
natural for them to reinvest cash,” he said. “That effectively
maintains the accommodative stance.”
Mortgage Debt
A total of $112.1 billion of the Fed’s government bond
holdings will mature in the next 12 months, 7 percent of the
$1.59 trillion in Treasuries held in its system open market
account, known to traders as SOMA. Replacing those securities
will require the Fed to buy an average of $9.4 billion of
Treasuries a month through June 2012.
The Fed also held $914.4 billion of mortgage-backed debt
and $118.4 billion of debentures, the debt of government
sponsored enterprises Fannie Mae and Freddie Mac, as of June 22.
UBS AG, Citigroup Inc., Bank of America Corp., JPMorgan Chase &
Co. and Royal Bank of Canada say $10 billion to $16 billion will
mature each month, depending on the pace of prepayments.
In a Bloomberg survey of 58 economists June 14-17, 79
percent said Fed Chairman Ben S. Bernanke will sustain the
central bank’s balance sheet at current levels until the fourth
quarter, compared with 52 percent in April. The Fed said June 22
its goal is to hold assets at $2.654 trillion.
Treasury 10-year yields fell as low as 2.85 percent June 24
after reaching 3.77 percent on Feb. 9. The two-year yield came
within one basis point of the record low, set November 2010,
reaching 0.32 percent on June 24.
Frustrated Fed
The yield on the benchmark 10-year note fell for a sixth
week to 2.87 percent, a decline of 8 basis points or 0.08
percentage point. The price of the 3.125 percent security due in
May 2021 rose 22/32 in the five days to June 24, or $6.88 per
$1,000 face amount, to 101 22/32, Bloomberg Bond Trader prices
show. Two-year yields dropped 5 basis points to 0.33 percent
last week after reaching 0.32 percent, the lowest since Nov. 4
when they marked the all-time low of 0.3118 percent.
Bernanke said at a press conference June 22 that progress
bringing down the 9.1 percent U.S. unemployment rate was
“frustratingly slow.”
Fed officials said the economy will expand 2.7 percent to
2.9 percent this year, down from forecasts ranging from 3.1
percent to 3.3 percent in April. It was the second time this
year Fed officials lowered growth estimates. Gross domestic
product expanded 3.1 percent last year.
Policy makers said they expect the world’s largest economy
to grow 3.3 percent to 3.7 percent in 2012, according to their
central tendency forecasts. In April, their predictions ranged
from 3.5 percent to 4.2 percent.
Fear Factor
Fed officials predict an average unemployment rate of 8.6
percent to 8.9 percent in the final three months of 2011,
compared with 8.4 percent to 8.7 percent projected in April.
Their estimate for unemployment at the end of 2012 was in a
range of 7.8 percent and 8.2 percent, compared with 7.6 percent
to 7.9 percent in April.
While the Fed didn’t start a third round of quantitative
easing, as some traders speculated was needed, Treasuries could
gain on weakening of the economy or the European sovereign debt
crisis. “What always moves the market is fear and greed, and
there’s a huge amount of fear on the economy,” said David
Brownlee, head of fixed income at Sentinel Asset Management in
Montpelier, Vermont, which manages $28 billion. “That’s where
you want to have Treasuries.”
The conflict between Obama’s administration and Congress
over increasing the government’s borrowing limit could lead to
higher yields as Moody’s Investors Service and Standard & Poor’s
said they may consider cutting the nation’s AAA credit rating
unless progress is made next month.
Debt Ceiling
Vice President Joseph R. Biden’s bi-partisan deficit-
reduction group has been meeting since May 5 to reach a
compromise that would trim long-term deficits by as much as $4
trillion and clear the way for a vote in Congress to raise the
$14.29 trillion debt ceiling. Treasury Secretary Timothy F.
Geithner has said the U.S. risks defaulting if the limit isn’t
increased by Aug. 2.
The 10-year Treasury note’s yield will reach 4 percent by
June 2012, according to the median of 64 forecasters in a
Bloomberg News survey. The last time it reached 4 percent was
April 2010. Should that happen, investors would lose 5 percent
on their investment, Bloomberg data show.
“Up until now, our assumption was that the risk is
virtually zero of them ever missing an interest payment,”
Steven Hess, Moody’s senior credit officer, said in an interview
June 21. “If they actually miss a debt payment, then it’s a
fundamental change.”
Record Auction Demand
So far, there’s been no lack of demand for government
securities even as public Treasury debt has grown to $9.26
trillion from $4.5 trillion at the start of the financial crisis
in August 2007, and $5.75 trillion when Obama took office in
January 2009.
Investors have bid a record $3.01 for every dollar of debt
sold by the Treasury this year, compared with $2.99 last year
and $2.50 in 2009. The average 10-year yield this year of 3.32
percent compares with a 20-year average of 5.17 percent.
The Fed won’t raise its zero to 0.25 percent target rate
for overnight loans between banks until the second quarter of
next year, according to the weighted average forecast of 71
analysts surveyed by Bloomberg.
“The economic recovery is continuing at a moderate pace,
though somewhat more slowly than the committee had expected,”
Fed policy makers said in a June 22 statement. While the labor
market has been “weaker than anticipated,” the impact of
higher food and energy prices on consumption is likely to be
“temporary,” officials said.
Inflation Expectations
Yields on 10-year Treasury Inflation Protected Securities
show bond traders project an average 2.1 percentage point
inflation rate during the life of the debt, up from 1.5
percentage points in August 2010, when Bernanke first indicated
the central bank might resume debt purchases to fight deflation.
QE2 also succeeded in driving investors into riskier assets, The
Standard & Poor’s 500 Index has gained 22 percent during the
period.
The Fed began its first round of quantitative easing in
November 2008 after the collapse of Lehman and the central
bank’s $85 billion bailout of insurer American International
Group Inc. with a program to buy $500 billion of mortgage
securities and $100 billion of agency debentures. In March 2009
it boosted planned purchases to include $300 billion of
Treasuries and raised its target for mortgage debt to $1.25
trillion and $200 billion of government agency bonds.
Asset purchases, even at a smaller scale, “still promotes
what the Fed was trying to accomplish,” said Tony Crescenzi, a
money manager and strategist at Newport Beach, California-based
Pacific Investment Management Co., which runs the world’s
biggest bond fund. “Even with the stoppage of QE2, the
fundamental forces remain intact.”
biggest buyer of Treasuries, even after the second round of
quantitative easing ends this week, as the central bank uses its
$2.86 trillion balance sheet to keep interest rates low.
While the $600 billion purchase program, known as QE2,
winds down, the Fed said June 22 that it will continue to buy
Treasuries with proceeds from the maturing debt it currently
owns. That could mean purchases of as much as $300 billion of
government debt over the next 12 months without adding money to
the financial system.
The central bank, which injected $2.3 trillion into the
financial system after the collapse of Lehman Brothers Holdings
Inc. in September 2008, will keep buying Treasuries to keep
market rates down as the economy slows. The purchases are
supporting demand at bond auctions while President Barack Obama
and Republicans in Congress struggle to close the gap between
federal spending and income by between $2 trillion and $4
trillion.
“I don’t think the Fed wants to remove accommodation in
any way, shape or form,” said Matt Toms, the head of U.S.
public fixed-income investments at Atlanta-based ING Investment
Management, which oversees more than $500 billion. “It’s quite
natural for them to reinvest cash,” he said. “That effectively
maintains the accommodative stance.”
Mortgage Debt
A total of $112.1 billion of the Fed’s government bond
holdings will mature in the next 12 months, 7 percent of the
$1.59 trillion in Treasuries held in its system open market
account, known to traders as SOMA. Replacing those securities
will require the Fed to buy an average of $9.4 billion of
Treasuries a month through June 2012.
The Fed also held $914.4 billion of mortgage-backed debt
and $118.4 billion of debentures, the debt of government
sponsored enterprises Fannie Mae and Freddie Mac, as of June 22.
UBS AG, Citigroup Inc., Bank of America Corp., JPMorgan Chase &
Co. and Royal Bank of Canada say $10 billion to $16 billion will
mature each month, depending on the pace of prepayments.
In a Bloomberg survey of 58 economists June 14-17, 79
percent said Fed Chairman Ben S. Bernanke will sustain the
central bank’s balance sheet at current levels until the fourth
quarter, compared with 52 percent in April. The Fed said June 22
its goal is to hold assets at $2.654 trillion.
Treasury 10-year yields fell as low as 2.85 percent June 24
after reaching 3.77 percent on Feb. 9. The two-year yield came
within one basis point of the record low, set November 2010,
reaching 0.32 percent on June 24.
Frustrated Fed
The yield on the benchmark 10-year note fell for a sixth
week to 2.87 percent, a decline of 8 basis points or 0.08
percentage point. The price of the 3.125 percent security due in
May 2021 rose 22/32 in the five days to June 24, or $6.88 per
$1,000 face amount, to 101 22/32, Bloomberg Bond Trader prices
show. Two-year yields dropped 5 basis points to 0.33 percent
last week after reaching 0.32 percent, the lowest since Nov. 4
when they marked the all-time low of 0.3118 percent.
Bernanke said at a press conference June 22 that progress
bringing down the 9.1 percent U.S. unemployment rate was
“frustratingly slow.”
Fed officials said the economy will expand 2.7 percent to
2.9 percent this year, down from forecasts ranging from 3.1
percent to 3.3 percent in April. It was the second time this
year Fed officials lowered growth estimates. Gross domestic
product expanded 3.1 percent last year.
Policy makers said they expect the world’s largest economy
to grow 3.3 percent to 3.7 percent in 2012, according to their
central tendency forecasts. In April, their predictions ranged
from 3.5 percent to 4.2 percent.
Fear Factor
Fed officials predict an average unemployment rate of 8.6
percent to 8.9 percent in the final three months of 2011,
compared with 8.4 percent to 8.7 percent projected in April.
Their estimate for unemployment at the end of 2012 was in a
range of 7.8 percent and 8.2 percent, compared with 7.6 percent
to 7.9 percent in April.
While the Fed didn’t start a third round of quantitative
easing, as some traders speculated was needed, Treasuries could
gain on weakening of the economy or the European sovereign debt
crisis. “What always moves the market is fear and greed, and
there’s a huge amount of fear on the economy,” said David
Brownlee, head of fixed income at Sentinel Asset Management in
Montpelier, Vermont, which manages $28 billion. “That’s where
you want to have Treasuries.”
The conflict between Obama’s administration and Congress
over increasing the government’s borrowing limit could lead to
higher yields as Moody’s Investors Service and Standard & Poor’s
said they may consider cutting the nation’s AAA credit rating
unless progress is made next month.
Debt Ceiling
Vice President Joseph R. Biden’s bi-partisan deficit-
reduction group has been meeting since May 5 to reach a
compromise that would trim long-term deficits by as much as $4
trillion and clear the way for a vote in Congress to raise the
$14.29 trillion debt ceiling. Treasury Secretary Timothy F.
Geithner has said the U.S. risks defaulting if the limit isn’t
increased by Aug. 2.
The 10-year Treasury note’s yield will reach 4 percent by
June 2012, according to the median of 64 forecasters in a
Bloomberg News survey. The last time it reached 4 percent was
April 2010. Should that happen, investors would lose 5 percent
on their investment, Bloomberg data show.
“Up until now, our assumption was that the risk is
virtually zero of them ever missing an interest payment,”
Steven Hess, Moody’s senior credit officer, said in an interview
June 21. “If they actually miss a debt payment, then it’s a
fundamental change.”
Record Auction Demand
So far, there’s been no lack of demand for government
securities even as public Treasury debt has grown to $9.26
trillion from $4.5 trillion at the start of the financial crisis
in August 2007, and $5.75 trillion when Obama took office in
January 2009.
Investors have bid a record $3.01 for every dollar of debt
sold by the Treasury this year, compared with $2.99 last year
and $2.50 in 2009. The average 10-year yield this year of 3.32
percent compares with a 20-year average of 5.17 percent.
The Fed won’t raise its zero to 0.25 percent target rate
for overnight loans between banks until the second quarter of
next year, according to the weighted average forecast of 71
analysts surveyed by Bloomberg.
“The economic recovery is continuing at a moderate pace,
though somewhat more slowly than the committee had expected,”
Fed policy makers said in a June 22 statement. While the labor
market has been “weaker than anticipated,” the impact of
higher food and energy prices on consumption is likely to be
“temporary,” officials said.
Inflation Expectations
Yields on 10-year Treasury Inflation Protected Securities
show bond traders project an average 2.1 percentage point
inflation rate during the life of the debt, up from 1.5
percentage points in August 2010, when Bernanke first indicated
the central bank might resume debt purchases to fight deflation.
QE2 also succeeded in driving investors into riskier assets, The
Standard & Poor’s 500 Index has gained 22 percent during the
period.
The Fed began its first round of quantitative easing in
November 2008 after the collapse of Lehman and the central
bank’s $85 billion bailout of insurer American International
Group Inc. with a program to buy $500 billion of mortgage
securities and $100 billion of agency debentures. In March 2009
it boosted planned purchases to include $300 billion of
Treasuries and raised its target for mortgage debt to $1.25
trillion and $200 billion of government agency bonds.
Asset purchases, even at a smaller scale, “still promotes
what the Fed was trying to accomplish,” said Tony Crescenzi, a
money manager and strategist at Newport Beach, California-based
Pacific Investment Management Co., which runs the world’s
biggest bond fund. “Even with the stoppage of QE2, the
fundamental forces remain intact.”
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