TREASURIES-Bonds tumble as Fed refrains to buy long debt
Wed Jan 28, 2009 10:57pm GMT
* Some traders had hoped for a bold Fed move now
* 30-year bond yield briefly hit highest level since Dec.
* Safety bids for bonds dry up as Wall Street rallies. (Updates market action, adds new quotes)
By Richard Leong
NEW YORK, Jan 28 (Reuters) - U.S. Treasury debt prices tumbled on Wednesday after the Federal Reserve refrained, for now, from buying long-dated government debt, disappointing investors who hoped for a bold move to help a fragile economy.
The Fed's perceived caution led to a sharp sell-off in Treasuries, particularly among long-dated issues. The 30-year bond resumed its recent price decline, falling for seven of the past eight sessions. The 30-year yield briefly broke above 3.46 percent, the highest rate since Dec. 1.
"What was disappointing to some traders in the market is that...they are talking about buying them but not actually doing it," said Stuart Spodek, co-head of U.S. fixed income with the BlackRock Fixed Income Portfolio Management Group in New York.
The price drop in the benchmark 10-year note <US10YT=RR> was less severe, falling 25/32 at 109-9/32. Its yield, which moves inversely to price, was 2.67 percent, up from 2.58 percent late on Tuesday.
The Federal Open Market Committee, the Fed's policy-setting group, at the close of its two-day meeting on Wednesday, said: "The Committee is also prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in the private credit markets." For more, see [ID:nTRT000361]
Analysts said the sole disenting vote, cast by Richmond Fed President Jeffrey Lacker, who is known as an anti-inflation hawk, provided a surprising twist. Lacker said he favored buying Treasuries now rather than expanding other credit programs.
Treasury prices also succumbed to a fade-out in safety bids when Wall Street extended gains in the wake of the FOMC statement, which equity investors viewed more favorably than their bond counterparts.
Major U.S. stock indexes rose as much as 3.55 percent, led by a hefty jump in financial shares on optimism the Obama Administration was making progress on a plan to relieve banks of toxic assets. For more, see [.N]
TENSION BETWEEN FED VS MARKET
Bond investors' negative reaction to the Fed's reticence to move forth with a plan to buy long-dated Treasuries suggested the tension between Fed policy-makers, who tend to be cautious, and certain parts of the market that want more aggressive action, analysts and traders said.
"The Fed needs to be careful in doing this," said Tom Girard, portfolio manager of the MainStay Balanced Fund in New York, which has about $805 million in assets.
The Fed has achieved some success in bringing down mortgage rates and certain corporate borrowing costs, most notably the benchmark interbank dollar rates.
A move to buy long-dated government debt may create unintended, even undesirable, consequences for Fed policy-makers, Girard said.
For example, if Treasury yields fall much further, it may make it less profitable for banks to offer mortgages -- whose rates are set against Treasury yields. Less mortgage lending would cause more problems for the battered housing sector, he said.
With the Fed meeting out of the way, investors will turn their focus once again on the looming supply and economic data, traders and investors said.
On Thursday, the Treasury Department will sell $30 billion in five-year notes, the final auction this week.
On the data front, the government will release data on durable goods, jobless claims and new home sales. These reports are all expected to show further economic deterioration.
In other cash trading, the two-year note <US2YT=RR> was down 4/32 in price for a yield of 0.91 percent, up from 0.84 percent late on Tuesday. (Editing by Leslie Adler)
Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
