Rising 30-year Treasury yield raises Fed buying expectations

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NEW YORK (Reuters) – Investors expect the Federal Reserve to act to tame a surge in yields by increasing its purchases of long-term Treasuries, after the U.S. central bank said it would allow the inflation to rise higher.

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, USA, March 19, 2019. REUTERS / Leah Millis / File Photo

Yields on 30-year US Treasuries US30YT = RR hit a two-month high on Friday. Rising yields is a potential problem for the Fed, as it increases the cost of borrowing for businesses and individuals and threatens economic growth.

Some investors have said the central bank may have to address the possibility of buying longer-term debt at its policy meeting in mid-September, if not earlier. Investors previously expected the Fed to introduce this policy by the end of the year.

“The Fed cannot afford to raise long rates significantly because it would undo everything it has done in the past six months,” said Gershon Distenfeld, co-director of fixed income at AllianceBernstein.

The Fed has bought nearly $ 2 trillion in Treasury debt since the start of the coronavirus pandemic – bringing its current holdings to around $ 4.36 billion – in order to keep interest rates low and maintain liquidity of the market. The majority of these purchases were made in the form of shorter duration tickets.

(Chart: Fed Treasury holdings by maturity, here)

The yield on 30-year Treasuries is particularly sensitive to inflation expectations, as the value of a bond can be eroded by rising consumer prices over time.

Fed Chairman Jerome Powell on Thursday carried out a radical rewrite of central bank monetary policy, which prioritized strengthening the U.S. labor market and less weighted concerns about too high inflation .

The 30-year yield jumped 9.4 basis points on Thursday, then jumped 7.7 basis points on Friday to 1.577%, the highest since June 16.

Some investors believe yields would need to rise for the Fed to expand its purchases.

“I don’t think we’re there yet. But I would expect this to become a growing part of the conversation. I think at the next Federal Open Market Committee (FOMC) meeting someone will bring up the idea, ”said Jon Hill, US rates strategist at BMO Capital Markets.

The Fed has used this tactic before. In the aftermath of the 2007-2009 financial crisis and recession, the Fed used Operation Twist, an initiative that consisted of selling short-term notes and buying long-term bonds. With interest rates already close to zero, the Fed bought long-term bonds to reduce yields and thereby stimulate growth and encourage borrowing.

Reporting by Kate Duguid; Edited by Ira Iosebashvili and Paul Simao

Our standards:Thomson Reuters Trust Principles.

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