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Rising bond yields reveal Bernanke QE converges with growth

By Steve Matthews and Caroline Salas Gage, Bloomberg

January 30, 2013 • Reprints

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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Related Terms
US Federal Reserve 8527Bloomberg 5254fed 3336financials 2975Interest Rates 2108Standard & Poor 2008California 1387Federal Reserve 1207Department of Commerce 838Michigan 789Federal Open Market Committee 773Qe 751Ben S. Bernanke 751gross domestic product 748Ben S 613Bank of America Merrill Lynch 384Wyoming 344Bernanke 308Yields 202James Bullard 190Wells Fargo & Co. 172Wisconsin 120the University of Michigan 110New York University 77Kansas City Fed 59University of California 53Esther George 38Capital Economics Ltd. 23bank presidents 21Jonathan Wright 16home lender 14Division of Monetary Affairs 12Johns Hopkins University 11James Hamilton 9Diane Swonk 9San Diego 7Mark Gertler 5Paul Dales 4Mesirow Financial Holdings Inc. 3Gerald R. Ford School of Public Policy 3indication residential real estate 2John G. Stumpf 1

Free Newsletter Modern Trader Follow

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