Bernanke sedates bond traders seeing Treasuries added to QE3

Fed’s Outlook

The rate has fallen from this year’s high of 2.40 percent on March 20, and last year’s high of 3.77 percent in February, showing that signs of growth haven’t been enough to persuade dealers or Bernanke that the economy is back on track.

As well as announcing purchases of mortgage-debt, policy makers said last month they would probably hold the federal funds rate at about zero at least through mid-2015. The Federal Open Market Committee is scheduled to meet Oct. 23-24.

“If we were to see some good news on growth I would not expect policy makers to respond in a hasty manner” and remove stimulus, Fed Bank of New York President William C. Dudley said in a speech in New York Oct. 15.

Volatility would likely increase if traders expected the Fed to stop buying bonds anytime soon. Instead, it has fallen. Bank of America Merrill Lynch’s MOVE Index, which measures volatility based on prices of over-the-counter options on securities maturing in two to 30 years, ended last week at 68.5, down from the year’s high of 95.4 on June 15.

Subpar Growth

“The defining characteristic of the Treasury market over the next several months will be the low volatility,” Carl Lantz, the New York-based head of interest-rate strategy for Credit Suisse Group AG, said in an Oct. 17 telephone interview.

The company’s economists forecast the Fed will purchase $45 billion a month in Treasuries next year.

GDP will expand at a 2.1 percent annual rate for 2012, according to the median estimate of 99 economists in a Bloomberg survey. Growth averaged 3.1 percent in the three years before the financial crisis hit in 2007 as the Fed raised its benchmark rate to 5.25 percent from 1 percent.

“If economic growth remains near where it is now, it will be difficult for the Fed to make the argument that we’ve had sustained and substantial improvement” when they meet in December, Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, said in a telephone interview on Oct. 12.

Obama, Romney

The U.S. economy would slow by as much as 0.5 percent next year if Congress allows the $607 billion in tax increases and budget cuts to go into effect Dec. 31, according to the Congressional Budget Office.

Half the spending decreases are in Defense Department programs. Contractors including Lockheed Martin Corp. and Northrop Grumman Corp. have warned that layoffs may result. Take-home pay will shrink if temporary reductions in payroll taxes are allowed to expire.

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