Tags: bonds

Fed Unlikely to Bail Out Bond Market

By Dan Weil   |   Monday, 01 Jun 2009 08:15 AM

The Federal Reserve is unlikely to accelerate its purchases of Treasuries and mortgage-backed securities to staunch the recent run-up in bond yields for now, The Wall Street Journal reports.

The 10-year Treasury yield hit a six-month high of 3.75 percent on May 28, and the 30-year fixed mortgage rate reached a three-month peak of 5.44 percent.

But Fed officials see the rate increase as a signal that the economy and financial system are rebounding. So they are reluctant to jump in, The Journal says.

"The market believes that the Fed will expand its purchases of mortgage-backed securities and Treasuries," Ronti Pal, head of U.S. interest rates trading at Barclays Capital, told the paper.

"But the longer it takes the Fed to do so, the more the market overwhelms the Fed's efforts and the risk increases for an even sharper rise in yields."

The Fed committed to buy $1.45 trillion of mortgage debt and $500 million of Treasuries to get the credit markets flowing normally again.

The purchases have totaled $130.5 billion of Treasuries and $481 billion of mortgage securities since March.

Fed Chairman Ben Bernanke told Congress last month that the Fed doesn’t seek "to target a particular interest rate." But it still may end up having to speed up its bond buying at some point in the future.

Some experts are worried over the bond market slump. “The bear market in Treasuries challenges the housing market recovery and the economy,” David Ader of RBC Capital Markets told CNBC.

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