BOND REPORT: Treasurys Down After Bernanke Says Fed May Buy U.S. Debt
January 13 2009 - 12:10PM
Dow Jones News
By Deborah Levine
Treasury prices declined Tuesday as yields moved higher, after
Federal Reserve Chairman Ben Bernanke said more government action
would be needed to strengthen the financial system.
Two-year note yields (UST2YR) rose 2 basis points to 0.76%. A
basis point is one one-hundredth of a percent.
Ten-year note yields (UST10Y) rose 3 basis points to 2.33%.
The timing and strength of any global recovery remain "highly
uncertain," Bernanke said in a speech in London.
Bernanke said the next step should be getting toxic assets, like
those tied to subprime mortgages, off bank balance sheets -- the
original intent of the Troubled Asset Relief Program funding.
He also said the Fed may expand its program to buy asset-backed
securities, which pool borrowings such as car and student loans and
credit-card debt.
"We'll see a continuing shift of risky assets from the private
sector to the public sector," said Mustafa Chowdhury, head of U.S.
interest rate research at Deutsche Bank. "The challenge is that the
government will need to borrow a lot."
Treasury issuance could exceed $2 trillion in the remaining
three quarters of 2009, much more than the government's official
estimates, according to Chowdhury.
"They need bigger guns to handle consumer credit," which
includes mortgages and car loans, than the amount spent for far
shoring up banks, he said.
Bernanke also restated that the U.S. central bank could buy
longer-term Treasurys to keep loan rates low.
The Fed has begun buying billions of dollars in mortgage-backed
securities and debt sold by housing agencies including Fannie Mae
(FNM) and Freddie Mac (FRE) to lower mortgage rates and spur growth
in the housing market.
So far, the program has been successful in bringing down
mortgage rates by reducing the gap between Treasurys, a benchmark
for many types of loans, and yields on mortgage or agencies
bonds.
Demand for Treasurys also waned as other sectors showed signs of
improvement.
Short-term interbank lending markets seem to be improving. The
Fed again didn't even receive enough bids to loan the amount
available at Monday's Term Auction Facility offering, indicating
banks have sufficient liquidity. The Fed loaned $107.7 billion in
28-day loans, after offering $150 billion.
Traders also noted more corporate bond sales, including possibly
from McDonald's (MCD) and FedEx (FDX), which could trigger some
selling of Treasurys used as hedges.
Also Tuesday, a government report showed the U.S. trade deficit
in November plunged to $40.4 billion, reflecting lower oil prices
and weakening demand for imports as the nation's economic woes
deepened.
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