Rates Up or Down?
From the wsj.com:
The Treasury market may be about to prove the haters wrong.
You can’t swing a dead cat these days without hitting someone warning about an imminent rise in rates on longer-term Treasury bonds—especially as the end looms for the Federal Reserve’s $600 billion bond-buying program. There are plenty of reasons cited for this expected aversion to U.S. government debt. Fiscal irresponsibility is one. Higher inflation is another.
Indeed, the Labor Department’s consumer-price index, which is being released on Friday, is expected to be up 2.6% in March from a year earlier. That is largely because of higher food and energy prices, though core inflation excluding those items is also expected to drift higher.
That would follow a string of reports this week that separately have shown producer prices and import prices are also on the rise.
Largely because of such concerns, some well-known bond investors like Bill Gross and Dan Fuss have cautioned that rates will rise once the Fed stops buying Treasury debt at the end of June.
After all, the Fed has purchased the equivalent of more than two-thirds of Treasury issuance since last fall. The worry is that when the central bank stops buying, no one else will step up, forcing rates higher.
Yet that reasoning seems flawed, given the unsteady nature of this recovery and the reaction in the markets when the Fed stopped buying bonds last year. If anything, rates have been rising when the Fed is buying, and falling when it isn’t—serving as both a gauge of growth prospects and a sign of how reliant markets and the U.S. economy have become on the Fed’s so-called quantitative-easing programs.
For example, the 10-year Treasury yield dropped from roughly 4% last April to 2.5% in August amid a growth scare following the end of the Fed’s first round of bond buying.
It is difficult to see why this time should be so different, although the labor market is in better shape than a year ago. The surprising weakness of first-quarter economic growth is a stark reminder of the recovery’s vulnerability.
When the Fed does exit from the market, investors just might pile back in. If history is a guide, Treasurys could yet surprise the bond gurus with their strength.