Bernanke sedates bond traders seeing Treasuries added to QE3

“There’s some reluctance to jump into the yields-are- going-higher trade until we have a better sense of how that’s going to play out,” Michael Cloherty, head U.S. interest-rate strategist at RBC Capital Markets in New York, said in an Oct. 15 telephone interview.

President Barack Obama has said he will veto legislation to address the expiration of measures that have held payroll and income taxes down unless it includes higher levies for the wealthiest citizens. Republican challenger Mitt Romney has promised not to reappoint Bernanke when his second four-year term ends January 2014. The presidential election is Nov. 6.

Increased Lending

Whoever wins, “it’s certainly possible that in the short term you’d get more fiscal drag, lower yields, a weaker economy,” Jan Hatzius, chief economist at Goldman Sachs Group Inc., said in an interview on Oct. 16. “But in general the pattern in 2013 is likely to be that as you go through the year the economy gets a bit better and yields pick up a bit.”

Banks have boosted loans to companies and equities have rallied. Commercial and industrial lending has climbed 23 percent to $1.48 trillion as of Oct. 10 from $1.2 trillion two years ago, after plunging from $1.6 trillion in October 2008, according to the latest data released by the Fed.

The Standard & Poor’s 500 Index climbed 16 percent this year through Oct. 19 after ending little changed in 2011. The S&P 500 fell 0.1 percent to 1,431.84 at 9:41 a.m. New York time.

Economists also point to turmoil in Europe as weighing on the U.S. A European Union summit last week failed to discuss further financial assistance for Spain, according to French President Francois Hollande.

‘Alarmingly High’

The International Monetary Fund in Washington said Oct. 9 it sees “alarmingly high” risks of a steeper global slowdown, with a one-in-six chance of growth slipping below 2 percent.

Tame inflation is another reason why bond volatility is low and traders say the Fed has scope to increase stimulus. Inflation as measured by the personal consumption expenditures index, the gauge preferred by the Fed, rose 1.6 percent in August from a year earlier, less than the central bank’s goal of 2 percent.

Fed Bank of Chicago President Charles Evans, who has called for additional monetary stimulus, said last month that policy makers should hold rates about zero until unemployment falls to 7 percent or inflation rises to 3 percent.

“In no uncertain terms, the Fed needs to see much lower unemployment,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, said in an interview Oct. 16. “Treasury yields are going to be capped by the fact that the Fed is going to buy a significant amount.”

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