Traders see Fed giving green light to wager on bond yield surge

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Traders see Fed giving green light to wager on bond yield surge


Is the Federal Reserve encouraging the bond bears?

That’s the view among market participants who say the U.S. central bank is showing diminished appetite for tweaking the size of its bond buying program or the maturities it buys. This growing perception among investors that the Federal Reserve will stay on the sidelines have helped fuel the selling seen across longer-dated Treasurys this week.

The Fed is currently buying $80 billion of U.S. Treasurys per month and $40 billion mortgage backed bonds.

“The Fed’s recent rhetoric on bond purchases is playing role in higher yields. I think we’re good for this year, I don’t see purchases changing rapidly,” said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, in an interview.

The prospect of an early tapering of the bond buying program or weighting bond purchases to longer-dated bonds had kept bearish traders on their toes. They had fretted the U.S. central bank could step in to prevent a disorderly rise in borrowing costs to keep financial conditions easy.

It’s why even as inflation expectations rose throughout last month, bond yields were reluctant to follow their rise, said analysts.

Yet that ended this week after the 10-year Treasury yield
TMUBMUSD10Y,
1.117%

pushed above the key 1% level that had capped trading of the benchmark maturity since March. At last check, it was trading at 1.10%, close to 20 basis points higher than where it stood at the end of last week.

Much of this yield surge has been driven by expectations for more fiscal stimulus under a Democratic-controlled Congress and Biden administration which would result in even more debt issuance.

Yet the Fed has had a strong role in the bond-market selloff, too, sending a strong message that it won’t look to prematurely taper its asset-buying in 2021.

Recent suggestions by senior Fed officials including from Cleveland Fed President Loretta indicate the central bank will keep the pace of its asset purchases constant throughout next year.

Meanwhile, Fed Vice President Richard Clarida said Friday there was no need to adjust which bond maturities it targeted anytime soon.

Minutes from the December meeting of the Federal Open Market Committee, the central bank’s rate-setting group, also showed only a few were in favor of weighting bond purchases towards longer-dated debt.

Ian Lyngen of BMO Capital Markets said the minutes were an indication the Fed would leave its bond-buying program intact as long as the economic situation did not deteriorate.



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