Treasury 30-year bond yields traded at almost nine-month highs after the Federal Reserve restated its commitment to asset purchases to spur economic growth, keeping alive the threat of inflation.
Yields rose as policy makers pledged to will keep purchasing securities under its third round of quantitative easing at the rate of $85 billion a month as the economy paused because of temporary forces including bad weather. The long bond’s yield touched the highest level since April before a report showed the U.S. economy unexpectedly contracted in the fourth quarter.
“Some people were looking for less accommodation from the Fed, but it’s clear that it is way too soon for that,” said Scott Graham, head of government bond trading in Chicago at Bank of Montreal’s BMO Capital Markets unit, one of the 21 primary dealers that trade with the U.S. central bank.
The 30-year yield was little changed at 3.18% at 3:24 p.m. New York time after touching 3.22%, the highest since April 12, according to Bloomberg Bond Trader data. The price of the 2.75% security due in November 2042 was 91 21/32.
The 10-year note yielded 1.99% after touching 2.03%, the highest since April 25.
‘Transitory Factors’
“Growth in economic activity paused in recent months in large part because of weather-related disruptions and other transitory factors,” the Federal Open Market Committee said after its first gathering of the year.
The purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The central bank also will continue reinvesting any Treasury securities that mature and will reinvest its portfolio of maturing housing debt into agency mortgage-backed securities.
The Fed repeated that the purchases will continue “if the outlook for the labor market does not improve substantially.”
The central bank spent $2.3 trillion on Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of it policy known as quantitative easing.
“The statement was more significant than people think it is and more hawkish,” said David Robin, an interest-rate strategist in New York at Newedge USA LLC, an institutional- brokerage firm. “The Fed is trying to, and succeeding in, shifting market sentiment toward more risky assets.”
The Fed also left unchanged its statement that it planned to hold its target interest rate near zero as long as unemployment remains above 6.5% and inflation remains below 2.5%.
Inflation Concern
The economy is forecast to have created 161,000 jobs in January, according to economists in a Bloomberg News survey, when the Labor Department announces this month’s nonfarm payroll data Feb. 1. Monthly job growth has averaged 153,000 since the start of 2011.
Government bonds briefly pared losses after gross domestic product, the volume of all goods and services produced, dropped at a 0.1% annual rate, the Commerce Department said, weaker than any economist forecast in a Bloomberg survey. A drop in government outlays and smaller gain in stockpiles cut a combined 2.6 percentage points from growth.
“Fourth-quarter gross domestic product was a reminder of how weak the underpinnings of the U.S. economy are,” Jeffrey Caughron, an associate partner at Baker Group LP in Oklahoma City, said in a telephone interview. The firm advises community banks on investments exceeding $42 billion. “The economy will continue to turn in subpar performance, which will compel the Fed to continue aggressive monetary easing.”
The Fed’s measure of traders inflation expectations for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, has climbed since the Fed announced it would buy $40 billion a month of mortgage-backed securities Sept. 13. It touched 2.88% today, the highest since Nov. 1, after averaging 2.52% in the six months before the mortgage purchases were announced.
