Bloomberg News

Fed ‘Twist’ Could Push U.S. 10-Year Yield Toward 1.6%, CRT Says

September 06, 2011

Sept. 6 (Bloomberg) -- The Federal Reserve may buy $520 billion of longer-maturity Treasuries while selling shorter-term U.S. debt, pushing the 10-year yield to as low as 1.6 percent, according to CRT Capital Group LLC.

The Fed’s $1.64 trillion of holdings of Treasuries includes $520 billion of debt maturing in 2014 and sooner, which could be sold and reinvested in securities due between 2018 and 2039 in order to raise the duration of the central bank’s government debt portfolio to 7.4 years from 4.9 years, CRT strategists David Ader and Ian Lyngen wrote in a note to clients today.

“The market is pricing it in,” Stamford, Connecticut- based Ader said in a telephone interview. “Things seem to be on the edge of breaking down. The Fed feels it wants to do something, or at least acknowledge it still has some tools in its box to keep hope alive.”

Fed Chairman Ben S. Bernanke has cited extending the average maturity as one of monetary stimulus tools available to policy makers to boost the economy and employment. Economists with the Fed’s regional bank in San Francisco wrote in April that “Operation Twist,” a 1961 initiative by the central bank and President John F. Kennedy’s administration, where the Fed sold short-term debt and bought securities with longer maturities, produced a 0.15 percentage point reduction in long- term Treasury yields.

The gap between two- and 10-year Treasury yields has narrowed to 1.77 percentage points from 2.44 percentage points at the end of July. Ten-year note yields fell one basis point today to 1.97 percent after touching a record low of 1.9066 percent.

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Pacific Investment Management Co., Goldman Sachs Group Inc. and Royal Bank of Canada said they expect the central bank to announce plans to raise the average maturity of its bond portfolio by selling shorter-term debt and reinvesting proceeds from maturing securities into longer-term bonds. The Fed purchased $2.3 trillion of debt since 2008 in two previous rounds of what’s become known as quantitative easing, or QE, to drive rates lower and help spur growth.

The Fed has become the focus of speculation regarding stimulative policies because any effort by the Obama Administration to boost the economy with fiscal programs would likely be opposed by Republicans in Congress, Ader said.

Payrolls were unchanged last month, the weakest reading since September 2010, after an 85,000 gain in July that was less than initially estimated, Labor Department data showed Sept. 2. The median forecast in a Bloomberg News survey called for a rise of 68,000.

Economic Path

The economy expanded at a 1 percent pace in the second quarter following a 0.4 percent gain in the first three months of the year, the Commerce Department reported last month. Consumer spending grew 0.4 percent, the smallest increase since the last three months of 2009.

Traders drove the 10-year yield down by 0.46 percentage point when the Fed announced its $300 billion round of quantitative easing in March 2009 and the market pushed the 10- year yield down about 0.65 percentage point in anticipation of QE2, Ader and Lyngen wrote.

“Another 50 basis points to 65 basis points in the 10-year sector would put yields on an approach to 1.60-1.75 percent,” Ader and Lyngen wrote. “We’ve had 1.75% as a potential target for this cycle and recent trends have only enhanced that prospect.”

Treasuries had their best month in August since December 2008 during the worst turmoil of the financial crisis, returning 2.8 percent, according to Bank of America Merrill Lynch bond indexes. They have gained 8.1 percent so far this year, after a 5.9 percent gain in 2010 and a 3.7 percent decline in 2009.

--Editors: Paul Cox, Dave Liedtka

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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