Bonds slid last week after “several” Fed officials said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to minutes of their Dec. 11-12 meeting. The Fed said in December that it plans to buy $45 billion of Treasuries a month in addition to $40 billion per month of mortgage-debt purchases begun in September.
While Congress last week passed budget measures that averted most of more than $600 billion in automatic tax increases and federal spending cuts that were scheduled to start this year, U.S. lawmakers will address the issue of deficit reduction as they negotiate raising the debt ceiling.
The U.S. reached the statutory limit of $16.4 trillion on Dec. 31, and the Treasury began using extraordinary measures to finance the government. It will exhaust that avenue as soon as the middle of February, according to the Congressional Budget Office.
“A good resolution on fiscal issues will give a massive boost to the economy, which is improving slowly but surely,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “Our forecast of 2.35% for 10-year Treasuries by the end of the year is quite moderate, especially given the recent move.”