Wednesday, April 29, 2009

Fed Gets a Test on Treasurys

The Wall Street Journal - Treasurys slumped Tuesday, and the 10-year note's yield rose above 3%, as the market tested the Federal Reserve ahead of the end of its monetary-policy-setting meeting on Wednesday after a so-so five-year note auction and stronger data.

The 10-year yield rose as high as 3.03% following the auction as losses picked up speed. Treasurys had started to weaken midmorning after data that showed a surprise jump in consumer confidence this month. That figure erased early gains spurred by continued worries about the health of the banking sector.

The 10-year yield has bounced around 3% for most of the month, but had failed to close above that level since mid-March, before the Fed began its Treasury-buying program. Late Tuesday, the 10-year note was yielding 3.002%.

Strategists are focusing on 3.04% as the next key level if supply concerns continue to push yields higher, followed by 3.10% and then 3.25%.

Reaching 3.25% would likely concern policy makers, said Carl Lantz, interest-rate strategist at Credit Suisse in New York, as it could force mortgage rates to rise above 5%. The Fed may then decide to increase its purchases of Treasurys, a program it kicked off March 25 to help drive down consumer borrowing rates.

"There's more of a sense we could see the market break now and test the Fed's resolve to be more aggressive" in its buying, Mr. Lantz said, adding he doesn't believe the Fed will refer to any added buying in its policy-meeting statement Wednesday.

Instead, the Fed is likely to stress that it will work to keep long-term borrowing rates low. If it words the statement correctly, Treasurys could rally.

The Fed, though, could choose to surprise market participants Thursday when it buys Treasurys in 10- to 17-year maturities. Its previous foray into buying longer-term Treasurys was relatively small, at $2.5 billion. The Fed could decide to purchase more than it has in the past and send a message to the bond market that it wants to keep long-term yields in check, Mr. Lantz said.

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