U.S. Government Bond Prices Fall as Investors Await Fed Balance Sheet Shrinkage
September 19 2017 - 5:18PM
Dow Jones News
By Daniel Kruger
U.S. government bond prices fell for a seventh day, the longest
decline since March, as the Federal Reserve began its latest
meeting.
The yield on the benchmark 10-year U.S. Treasury note rose to
2.239%, from 2.230% Monday. Yields rise as bond prices fall.
Yields inched higher as investors anticipated the Federal
Reserve will announce a plan to trim its balance sheet as part of
its effort to return monetary policy to a noncrisis footing.
Traders were also analyzing reports that the European Central
Bank is unsure of when to begin shrinking its EUR60 billion a month
of bond purchases and that the Bank of Canada is concerned it may
risk boosting its currency too much, threatening its own
recovery.
Investors have focused on the impact that the Fed's expected
decision may have on the prices of stocks and other financial
assets. One of the Fed's objectives in pumping money into the
economy through bond purchases was to boost spending and inflation
by lifting securities prices. With that policy about to unwind,
traders are anticipating the stock market could lose some of its
momentum.
Central bankers "are very sensitive to pulling back the
accommodation," said Thomas Tucci, head of Treasury trading at CIBC
World Markets Corp. "They don't know what's on the other side."
Some analysts said the Fed could try to soothe some of the sting
from shrinking the money supply by adjusting its economic and
market forecasts to reflect a more modest trajectory of future
growth and signal a more gradual pace of policy tightening.
Gennadiy Goldberg, a bond strategist at TD Securities in New York,
said the central bank could revise some economic forecasts with a
more-dovish outlook.
The Fed currently holds $4.2 trillion of bonds on its balance
sheet. Policy makers have outlined a plan where the central bank
would allow $6 billion of Treasurys and $4 billion of mortgage
bonds to mature each month without reinvesting the proceeds in new
securities. The Fed would then increase the size of its pullback in
three-month intervals.
Investors and traders forecast the central bank will shrink its
holdings by $1 trillion or more through this process. While the
impact is expected to be modest at first, as it progresses it could
become an increasingly potent brake on credit creation and economic
growth, analysts said.
(END) Dow Jones Newswires
September 19, 2017 17:03 ET (21:03 GMT)
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