By Sam Goldfarb
Some investors are betting that the Federal Reserve could start
buying more long-term U.S. Treasurys as soon as its next policy
meeting, a trend that has helped temper some recent selling and
kept yields from rising higher.
One factor influencing such bets: the outcome of the Nov. 3
election, which resulted in the strong possibility of divided
government in Washington and left investors thinking the Fed might
need to assume more responsibility to support an economy
increasingly buffeted by a surge in coronavirus cases.
Treasury Secretary Steven Mnuchin's decision to not extend
several emergency Fed lending programs beyond Dec. 31 also left the
Fed with fewer alternatives to Treasury purchases for economic
stimulus. Buying bonds helps boost the economy by reducing
longer-term Treasury yields, lowering the cost of borrowing for
individuals and businesses.
Minutes from the Fed's Nov. 4-5 meeting released last week
offered few clues about prospects for policy changes at the central
bank's next meeting on Dec. 15-16. Officials in early November
didn't think it was necessary to make immediate adjustments to
their bond-buying program. But they "recognized that circumstances
could shift to warrant such adjustments," the minutes said.
Renewed hopes that Congress could pass some sort of
coronavirus-aid package in a lame-duck session have helped lift the
yield on the benchmark 10-year U.S. Treasury note to 0.948% as of
Wednesday from 0.845% Monday. But that remained below the 0.970%
mark it reached three weeks ago, just after Pfizer Inc. released
highly encouraging results from its coronavirus vaccine trial.
Several investors and analysts said the prospect of more
long-term bond purchases has already accomplished a measure of what
Fed action might: bolstering demand for bonds and putting downward
pressure on yields, which fall when bond prices rise.
John Briggs, head of strategy for the Americas at NatWest
Markets, said he doesn't think the Fed will change its bond-buying
program this month. Still, he said he had thought for weeks that
"market speculation about [a possible change] would increase, which
would help keep yields a little bit contained." If anything, he
said, that happened sooner than he had anticipated.
It has been a bumpy ride for yields recently.
In the month before the Nov. 3 election, the yield on the
benchmark 10-year U.S. Treasury note climbed to around 0.9% from
just under 0.7%, based largely on expectations that Democrats would
win the White House and both chambers of Congress. That would allow
them to pass trillions of dollars in new spending measures that
would both stimulate the economy and increase the supply of
government bonds.
When Democrats didn't win as many Senate seats as expected, the
10-year yield quickly fell back under 0.8%, according to Tradeweb.
The following week, it rebounded after Pfizer's announcement, only
to be again pulled down by investors' concerns about rising
coronavirus cases and the possible Fed response.
The Fed right now is buying around $80 billion of Treasurys each
month along with $40 billion of mortgage-backed securities, net of
redemptions. In September, officials clarified that the purchases
were intended to support the economic recovery, after being
initiated in March to improve the technical functioning of the bond
market.
Most investors don't expect the central bank to increase the
total amount of Treasurys it buys monthly. But some think it could
shift its purchases toward more longer-dated Treasurys. That could
provide more economic stimulus because short-term Treasury yields
are already close to zero and many individuals and business take
out longer-term loans.
Analysts said there are several reasons why the Fed might not
adjust its bond purchases this month.
For one, the goal of buying more long-term Treasurys would be to
ease financial conditions. But financial conditions are already
quite loose, with stock indexes around record highs and Treasury
yields still below their pre-2020 lows.
In addition, many investors anticipate that Congress will pass a
coronavirus-relief package in the coming months, even if they
expect less than they did before the election.
The Fed, therefore, might be able to wait until after Dec. 16 to
see if it needs to ratchet up its stimulus. And it could always
make policy adjustments between meetings, analysts said.
Thomas Simons, money-market economist in the fixed-income group
at Jefferies LLC, said Jefferies had previously expected the Fed to
shift its bond purchases to more longer-dated Treasurys, but that
it had abandoned that call after the central bank didn't act in
previous meetings.
If officials were seriously considering an adjustment, they
would be doing more to signal "what would be a pretty major change
in their policy," he said.
Whatever happens over the next few weeks, many investors expect
Treasury yields to rise next year as coronavirus vaccines are
distributed and the economy returns to more normal footing. Even if
the Fed has altered its bond-buying program in the interim, faster
growth could lead to higher yields by spurring a higher rate of
inflation and hastening the day when the Fed can dial back its
stimulus.
Many investors, however, aren't willing to go all into that bet
just yet.
Jim Caron, head of global macro strategies for Morgan Stanley
Investment Management's fixed-income team, said the 10-year
Treasury yield could reach around 1.25% by the spring or summer of
next year because of the combination of coronavirus vaccines and
more economic aid from Congress.
Still, he isn't reducing longer-term Treasurys in his portfolios
just yet, partly because of the protection they offer if the
economy performs worse than expected this winter.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
December 02, 2020 16:19 ET (21:19 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.