Bloomberg News

Fed Reluctance May Push Yields to Lows, Misra Says: Tom Keene

July 10, 2012

Yields on benchmark 10-year Treasury notes may drop as low as 1.25 percent if the Federal Reserve is slow to provide more stimulus as the U.S. economy weakens, according to Bank of America Corp.’s Priya Misra.

“Markets are obsessed with QE3 right now. They expect QE3 the next bad data print. Everyone expects the Fed to jump in. What if the Fed wants to wait?” Misra, head of U.S. rates strategy at Bank of America Merrill Lynch, said on Bloomberg Television’s “Surveillance” in an interview with Tom Keene. “If we continue to get weak data and the Fed doesn’t jump in right away, that is when markets panic.”

The Fed bought $2.3 trillion of securities in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011 to support the economy. In September it embarked on a plan to replace $400 billion of short-maturity Treasuries in its portfolio with longer-term debt to cap borrowing costs. It expanded the effort, known as Operation Twist, on June 20 by $267 billion and extended it until year-end.

Some investors are speculating the central bank, which has said it will hold the rate low through at least late 2014, will consider a change in its so-called forward guidance and more debt purchases after employment growth was less-than-forecast in June for a fourth consecutive month.

“The Fed is telling us they don’t expect to hike rates until late 2014. I suspect they will move to 2015, potentially in the August policy meeting,” said New York-based Misra, who predicts that the 10-year note will yield between 1.75 percent and 2 percent a year from now.

‘Aftermath of 2008’

Ten-year note yields fell to a record low of 1.4387 percent on June 1 amid concern Europe’s two-year debt crisis is worsening and U.S. employment growth is slowing. The yield on the security was little changed at 1.51 percent at 10:38 a.m. New York time, according to Bloomberg Bond Trader prices.

“We are still dealing with the aftermath of 2008, when the markets broke down and needed immediate short term relief,” said Misra of Bank of America Merrill Lynch, one of the 21 primary dealers that trade with the Fed. “Now we are dealing with these longer-term structural problems.”

To contact the reporter on this story: Liz Capo McCormick in New York at

To contact the editor responsible for this story: Dave Liedtka at

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