Bernanke sedates bond traders seeing Treasuries added to QE3

The world’s biggest bond traders say the Federal Reserve will decide before year-end to buy Treasuries in addition to purchasing $40 billion of mortgage bonds a month as gains in U.S. employment and consumer confidence prove unsustainable.

All 21 primary dealers that trade with the central bank expect its latest quantitative-easing measures to be expanded to include government securities, according to a survey last week by Bloomberg News. Rather than increasing on speculation the central bank’s latest measures would spur the economy, volatility in the bond market has held at about the lowest since 1988, a sign of continued demand for the safety of Treasuries.

While the unemployment rate fell to 7.8 percent in September, the lowest level since 2009, and consumer confidence climbed to a six-month high, traders are looking ahead to a potential slowdown if Congress fails to avert $607 billion in mandated tax increases and spending cuts starting Dec. 31 and as Europe’s debt crisis drags into a fourth year. Economists at JPMorgan Chase & Co. cut their forecasts on Oct. 18 for U.S. economic growth in the first and second quarters of 2013.

“The Fed has said they are dissatisfied with the pace of the recovery, particularly the improvement of labor-market conditions,” Michael Gapen, director of U.S. economic research at Barclays Plc in New York and a former Fed economist, said in a telephone interview Oct. 17. “They have said they want to do more to generate a stronger recovery and to keep doing more until they get the recovery they want.”

Twist Ending

Expectations for more stimulus come with the Fed’s Operation Twist, an exchange of $667 billion in short-term debt for longer-maturity securities to help contain borrowing costs, scheduled to end Dec. 31. When they announced the mortgage buying plan on Sept. 13, policy makers said they would keep pumping money into the economy until there was “ongoing, sustained improvement” in the labor market.

None of the dealers expect the Fed to announce any new program when policy makers meet this week.

While the unemployment rate is below 8 percent for the first time since January 2009, and Commerce Department figures last week showed retail sales grew 1.1 percent in September after rising 1.2 percent in August for the best back-to-back showing since 2010, economists are still seeing weakness.

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