The Federal Reserve will “normalize” monetary policy sooner than many investors predict, according to UBS AG (UBSN), while Barclays Capital Inc. says forecasts of central bank interest-rate rises are “premature.”
Investors are questioning whether Chairman Ben S. Bernanke will stick to his pledge to keep the Fed’s benchmark interest rate near zero at least through late 2014 as the U.S. economy shows signs of improvement. Yields (.FF2) on two-year Treasuries -- among the most sensitive to what the Fed does with its target for overnight bank lending because of their short maturity -- rose to 0.14 percentage point more than the Fed rate on March 20, surpassing the five-year average of 0.13 percentage point.
“We regard the trend toward higher yields as a healthy development,” Andrew Cates in Singapore and Larry Hatheway and Christine Li in London wrote in a UBS report yesterday. “It reflects a healing process in the U.S. economy and recognition that the Fed will be able to normalize monetary policy earlier than many envisage.”
Investors should buy two-year Treasuries, Ajay Rajadhyaksha and Dean Maki, New York-based analysts at Barclays, wrote in a report yesterday. “We consider the recent rise in Fed hike expectations premature,” they wrote.
Two-year notes will “benefit from the Fed remaining on hold,” Barclays wrote in a separate report yesterday.
The two companies are among the 21 primary dealers that trade directly with the Fed and underwrite the U.S. debt.
Rates Near Zero
Policy makers have kept their target rate in a range of zero to 0.25 percent since December 2008. The Fed has purchased $2.3 trillion of Treasury and mortgage debt to cap borrowing costs. The central bank is currently in the process of swapping $400 billion of short-term Treasuries in its holdings for longer maturities in a program it plans to end in June.
U.S. yields surged after the central bank’s policy-setting Federal Open Market Committee raised its assessment of the U.S. economy on March 13.
Benchmark 10-year rates climbed to 2.40 percent on March 20, the highest level since October, rising from the record low of 1.67 percent set Sept. 23. They were 2.29 percent at 2:30 p.m. in Tokyo.
Two-year rates were 0.37 percent today, after rising to 0.41 percent on March 15, the most since July.
Officials are also debating what to do.
Fed Bank of St. Louis President James Bullard said the best time for the central bank to raise interest rates may be late 2013.
“It may be a good time to take stock of whether we may be at a turning point,” Bullard said in a speech in Hong Kong today. “As the U.S. economy continues to rebound and repair,” further action “may create an overcommitment to ultra-easy monetary policy.”
Chicago Fed President Charles Evans said the central bank needs to further ease policy to fuel the economic expansion, in a speech yesterday in Washington.
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