Bernanke says market turmoil ‘unlikely’ when bond-buying program ends
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They can’t both be right.
Pimco bond guru Bill Gross has been warning for months that Treasury bond interest rates are artificially depressed by the Federal Reserve’s $600-billion bond-purchase program launched last fall, and that rates could jump once the stimulus program ends June 30.
In his giant Pimco Total Return bond fund, Gross in February sold the last of his longer-term Treasuries, and in March he was actually “short” Treasuries -- an active bet that market rates would rise.
But Fed Chairman Ben S. Bernanke essentially said at his press conference on Wednesday that Gross was all wet.
Asked what he thinks will happen when the Fed stops buying Treasuries, Bernanke responded:
Our view is that -- based on past experience and based on our analysis -- is that the end of the program is unlikely to have significant effects on financial markets or on the economy. The reason being that first, just a simple point that we hope that we have telegraphed today, we hope we have communicated what we’re planning to do and the markets have well-anticipated this step. And you would expect that policy steps which are well-anticipated by the market would have relatively small effects, because whatever effects you’re going to have would have already been capitalized in the financial markets.
That’s what you’d expect him to say, but plenty of people on Wall Street agree with him: The market can’t be surprised by what it already knows is coming, they say.
What’s more, Bernanke said, the Fed for now plans to keep its portfolio of Treasury securities (currently $1.4 trillion) level by reinvesting the principal received from maturing Treasuries in new bonds.
“Put another way, the amount of . . . monetary policy easing should essentially remain constant going forward in June,” he said.
For now, the market is siding with Bernanke, and against Gross: Treasury yields are near their lowest levels of the last four months.
The 10-year T-note yield (charted at left), a benchmark for other long-term rates, ended at 3.36% on Wednesday, up from 3.31% on Tuesday but well below the 2011 high of 3.74% reached Feb. 18.
The 3-year T-note yield, at 1.07%, is down from a 2011 high of 1.41% on Feb. 14.
But to Gross’ point, how do we know where yields would be if the Fed wasn’t taking bonds off the market?
Wall Street has estimated that the Fed is buying the equivalent of most or all of the Treasury’s new issuance of bonds in the first half of this year, as the U.S. finances a budget deficit expected to total at least $1.4 trillion this fiscal year.
-- Tom Petruno