Treasury bond yields jump after Fed holds back on buying
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The Federal Reserve left the Treasury bond market in suspense today, after policymakers reiterated that the central bank might buy longer-term Treasuries but that it wasn’t making the decision just yet.
That has frustrated market bulls, triggering a sharp sell-off in T-bonds and driving yields higher.
With its benchmark short-term interest rate already at rock bottom, the Fed can’t make any more use of that tool to influence market rates. So the central bank last month signaled the possibility of buying T-bonds as a way to pull longer-term rates down.
In their post-meeting statement today, policymakers indicated that they would continue to buy mortgage-backed bonds (an attempt to drive home loan rates down), but that Treasury purchases were still just an option.
From the statement:
The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.
Treasury bond bulls had been hoping to see the Fed jump into the market, which could push bond prices up and yields down. So disappointment over the Fed’s statement has fueled dumping of Treasuries: The yield on the 30-year T-bond has jumped to 3.44%, the highest since Nov. 27 and up from 3.24% on Tuesday.
The 10-year T-note yield has risen to 2.68% from 2.53%.
The Fed may be holding back in case the Treasury market really needs its help in coming months, given the record borrowing the government will undertake this year, some analysts said.
‘It’s a carrot that’s still out there,’ said John Spinello, bond strategist at brokerage Jefferies & Co. in New York.
For more on the should-they-or-shouldn’t-they-buy-Treasuries debate, see this earlier post.
-- Tom Petruno