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Bond yields soar amid backlash to Fed's purchase plan

November 15, 2010 |  2:45 pm

U.S. Treasury bond yields soared Monday for a second consecutive session, even as the Federal Reserve formally launched its new $600-billion bond-buying plan.

The Fed’s goal was to keep longer-term interest rates suppressed, but so far it isn’t working out that way. And the surge in Treasury yields is wreaking havoc in other parts of the bond market, particularly municipal issues, which suffered another brutal sell-off Monday.

The yield on the 10-year T-note (charted below), a benchmark for mortgage rates, jumped to 2.96%, up from 2.75% on Friday and 2.65% on Thursday. The yield now is the highest since Aug. 2.

10y1115 In the mortgage bond market, where home loan rates are determined, the yield on the 30-year Fannie Mae mortgage-backed bond rocketed to a 4 1/2-month high of 3.80% from 3.64% on Friday.

In part, the bond market is experiencing the kind of classic indigestion that often follows a powerful rally, analysts and traders say. When the Fed began telegraphing in August that it wanted to do more to  bolster economic growth, Wall Street assumed that the central bank would launch a new program to buy Treasury bonds.

That drove yields down and bond prices up for much of September and October.

By the time the Fed actually announced the plan, on Nov. 3, it was inevitable that some investors would take profits in bonds. But the selling over the last week has been far heavier than many experts had anticipated -- and probably heavier than what the Fed anticipated, said Ray Remy, a veteran bond trader at Daiwa Capital Markets in New York.

“They did not expect this,” Remy said.

The Fed’s program, known as quantitative easing, has faced increasing backlash from some of its own policymakers, from U.S. trading partners and from some economists. Critics say the central bank risks fueling a global inflation fire by continuing to swamp the U.S. and global economies with easy money via bond purchases and near-zero short-term interest rates.

A group of economists and well-known Wall Street figures on Monday launched a public attack on the Fed’s plan and called for Chairman Ben S. Bernanke to halt the program.

But that may just have worsened the selling in the bond market: If investors fear the Fed won’t buy Treasuries as promised it could boost concerns that yields will climb much higher.

-- Tom Petruno