Bond bears collide with swaps showing low rates for 2 years

Bernanke Testimony

Bernanke told Congress last week in Washington that the central bank was maintaining its guidance that rates are likely to remain at record lows. There’s no evidence that the Fed’s unprecedented asset purchases risked sparking inflation or creating price bubbles, he said.

It’s the FOMC’s “intention to maintain accommodation as long as needed to promote a stronger economic recovery with stable prices,” Bernanke told the Senate Banking Committee Feb. 26 in Washington. “Since longer-term interest rates reflect market expectations for shorter-term rates over time, our guidance influences longer-term rates and thus supports a stronger recovery.”

The Fed’s bond purchases, a policy of known as quantitative easing, or QE, may not be the most important influence for yields. JPMorgan data shows that the end of QE would trigger only about an 8 basis-point rise in 10-year note yields, while the Fed’s plan to keep rates at zero into 2015 is keeping them about 40 basis points below where they’d be otherwise.

Inflation Slowdown

Record low rates since December 2008 have kept borrowing costs in check for everything from car loans to mortgages, while fostering an economic recovery that still isn’t assured. The unemployment is more than a percentage point above the Fed’s 6.5 percent goal and its preferred inflation gauge, the personal consumption expenditures index, rose 1.3% in January from a year earlier, the smallest increase since April 2011.

“Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading -- ironically enough -- to even longer period of low long-term rates,” Bernanke said in a March 1 speech in San Francisco.

Implied forward rates for contracts that show what traders expect the federal funds effective rate to average over a set time period in the future indicate that a quarter-percentage point increase won’t come until about the middle of 2015. The pricing in overnight index swaps of the Fed’s first rate increase has generally mirrored the Fed’s guidance over the past year.

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