Rising bond yields reveal Bernanke QE converges with growth

Since Federal Reserve Chairman Ben S. Bernanke in September began a third round of asset purchases aimed at lowering interest rates and spurring growth, bond yields have climbed. The trend may signal that his program is working.

Yields on the benchmark 10-year Treasury note have risen to 2.02% from 1.72% since the Fed announced new bond buying on Sept. 13, Bloomberg Bond Trader prices show. Those on bonds backed by home loans have increased to 2.01% as of yesterday from 1.26%, according to the Bank of America Merrill Lynch U.S. Mortgage-Backed Securities Index.

Interest rates are climbing as asset purchases help bolster confidence in economic growth, said James Hamilton, an economist whose research on Fed bond buying has been cited by Bernanke. U.S. stocks have advanced 3.3% since Sept. 13 as the outlook has improved, while yields on junk bonds have shrunk to within 4.78 percentage points of Treasuries as of yesterday from 5.5 percentage points.

“As the economy picks up, we’d expect that would be a force putting upward pressure on yields regardless of what the Fed is doing on the bond supply side,” said Hamilton, a professor at the University of California, San Diego, and former visiting scholar at Fed district banks including Atlanta and New York. “That’s what’s happening, and the Fed should be happy to see it.”

The Federal Open Market Committee today concludes a two-day meeting in Washington and will probably decide that the benefits of continuing to buy $85 billion in securities each month outweigh the risks from a ballooning balance sheet, according to 44 economists in a Bloomberg survey conducted Jan. 24-25. The Fed hasn’t set a limit on the size or duration of its purchases while pushing its total assets beyond a record $3 trillion.

Economic Strength

The third round of so-called quantitative easing, or QE, has probably held mortgage rates 20 basis points to 40 basis points lower than they otherwise would be, said Jonathan Wright, former assistant director of the Fed’s Division of Monetary Affairs. A basis point is 0.01 percentage point. Signs of economic strength have obscured those benefits by nudging interest rates higher, said Wright, an economics professor at Johns Hopkins University in Baltimore.

“QE marginally improves the economy, which drives rates back up,” he said, adding that the current round of asset purchases lacks the clout of the prior two programs.

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