Treasuries fell after the Federal Reserve said it will keep buying bonds at a pace of $85 billion a month and said that risks to the economy have decreased.
Yields on benchmark 10-year notes rose for a third day as the central bank said “the committee sees downside the risks to the outlook for the economy and the labor market as having diminished since the fall.” It repeated that it’s prepared to increase or reduce the pace of purchases depending on the outlook for the job market and inflation.
“The Fed’s let the genie out of the bottle,” Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that trade with the Fed, said before the central bank released its statement. “It’s not QE forever.”
The yield on the 10-year note rose eight basis points, or 0.08 percentage point, to 2.26 percent at 2:05 p.m. in New York, according to Bloomberg Bond Trader prices. The yield reached 2.29 percent on June 11, the highest since April 2012. It touched 1.61 percent on May 1.
The Fed has been buying $45 billion of Treasuries and $40 billion of mortgage securities each month to put downward pressure on borrowing costs in its third round of asset purchases. It has kept its target rate for overnight lending between banks at virtually zero since December 2008 to support the economy.
Benchmark 10-year note yields surged 55 basis points from May 1 to yesterday as investors speculated the Fed would cut back on stimulus. Bernanke told Congress’s Joint Economic Committee on May 22 the Fed could begin slowing bond purchases if it sees sustainable improvement in the labor market.
The 10-year Treasury yield will end 2013 at 2.35 percent, according to the median forecast of 77 economists in a Bloomberg News survey. That’s up from the 2.2 percent median forecast of a similar survey in May.
Treasuries rallied after the Fed ended its two previous rounds of asset purchases in March 2010 and June 2011. Ten-year yields (USGG10YR) slid to 2.47 percent in August 2010 from 3.83 percent in March 2010 on concern the economy faced the rising risk of deflation after the central bank ended $1.7 trillion of bond buying. The benchmark yields dropped to 1.92 percent in September 2011 from 3.16 percent in June 2011, when a $600 billion purchase-program ended.
The Fed is short of the 6.5 percent unemployment-rate threshold, with projected inflation below 2.5 percent, it said would be necessary to reach before considering an increase in the key interest-rate target.
While U.S. nonfarm payrolls swelled by 175,000 jobs in May, more than economists forecast in a Bloomberg survey, the jobless rate unexpectedly rose to 7.6 percent as more people entered the workforce. It had been 7.5 percent, the lowest level since December 2008.
Inflation has held below the central bank’s 2 percent target. U.S. consumer prices increased 1.4 percent for the 12 months that ended in May, versus a 1.1 percent year-over-year gain reported in April that was the lowest since 2010.
The yield gap between 10-year Treasuries and Treasury Inflation Protected Securities, a gauge of traders’ expectations for consumer prices over the life of the debt that’s called the 10-year break-even rate, reached a 17-month low this month. It touched 2 percentage points on June 13, the lowest level since January 2012, compared with an average of 2.38 percentage points over the previous 12 months.
The Fed’s measure of traders’ forecasts for consumer prices for the period from 2018 to 2023, the five-year, five-year forward break-even rate, dropped to 2.37 percent as of June 13, the lowest since Dec. 19, 2011.
The gauge was one-quarter-percentage point below 2.63 percent, its level on Sept. 13. That was the day the Fed said it would begin buying $40 billion a month of mortgage bonds “to support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate” of stable prices and full employment.
The central bank announced Dec. 12 it would increase asset purchases by $45 billion a month in Treasuries and said the buying would continue until the outlook for the labor market had improved “substantially.”
President Barack Obama said Bernanke has stayed in his post “longer than he wanted,” one of the clearest signals the Fed chief will leave when his current term expires next year.
“Ben Bernanke’s done an outstanding job,” Obama said in an interview this week with Charlie Rose, when asked about nominating him for another term subject to Senate approval. “He’s already stayed a lot longer than he wanted or he was supposed to.”
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