12/17/2015

Evenafterliftoff,Fedisstilltheelephantinthebondmarket|Reuters
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Markets|FriDec11,20152:11pmEST

Even after liftoff, Fed is still the elephant in the bond

market
NEWYORK|BYRICHARDLEONG

TheFederalReservebuildinginWashingtonSeptember1,2015.
REUTERS/KEVINLAMARQUE

TheFederalReserveisexpectedtoraiseU.S.interestratesnextweekbutthatdoesn't
meanit'sdisappearingfromthebondmarket,anditsongoingpresencethereshouldhold
downmortgageratesandcorporateborrowingcostsforyears.
TheFedmeetsnextTuesdayandWednesday.Whileitwillbegintoraiserates,ithas
signaleditwillmaintainitsbalancesheet,whichincludes$2.5trillioninU.S.government
debtasawayofensuringithasamplecashtosupporttheeconomy.
Morethan$200billionworthofTreasuriesintheFed'sportfolioarematuringin2016,but
thecentralbankisexpectedtoreinvestthoseproceeds,ratherthanletthemmatureand
rolloff.ItwilllikelywieldconsiderableinfluenceonlongertermTreasuriesyields,mitigating

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negativeeffectsfromtheriseinshorttermrates,analystsandinvestorssaid.
Another$1.1trillioninTreasurieswillmaturethrough2020.
"Withthereinvestmentprocessinthemarket,itwillcaprates.Itwon'tdrivethemdown,but
itwouldpreventthemfromrisingtooquickly,"saidGemmaWrightCasparius,senior
portfoliomanageratVanguard,thelargestU.S.mutualfundcompanyinMalvern,
Pennsylvania,withover$3trillioninassets.
TheFed'svastholdingsstemfromthreeroundsofbondpurchases,orquantitativeeasing,
whichexpandeditsTreasuriesownershipfivefoldfromtheendof2008.
TheFed'spurchaseswillcomeatatimewhenthefederalgovernmenthashinteditmay
scalebackitslongertermborrowingin2016.AReuterspollonDec.4showedbrokerages
http://www.reuters.com/article/ususafedmarketstreasuriesidUSKBN0TU2AM20151211

1/4

12/17/2015

Evenafterliftoff,Fedisstilltheelephantinthebondmarket|Reuters

thatdealdirectlywiththeFedgenerallydonotexpectthecentralbanktostartcuttingits
balancesheetforatleast12months.
"SourcesofdemandincludingFedreinvestmentsalongwithnetissuancedecliningwould
keeplongendyieldscontained,"saidGeneTanuzzo,portfoliomanageratColumbia
ThreadneedleinMinneapolis,whichhas$471billioninassets.
WhilethepaceoftheFedraterisesisstillupintheair,thebenchmark10yearTreasuries
yieldwilllikelyfirmto2.50percentbytheendof2016,accordingtofundmanagers
interviewed.IftheFedwerenottoreinvestinTreasuries,analystsprojectedthe10year
yieldwouldshootupto3percent.
OnFriday,the10yearyieldUS10YT=RRwasat2.17percent.
AUCTION"ADDONS"

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InvestorsanticipatetheFedwillshareitsplansonreplenishingitsTreasuriesholdingsat

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theendofitsDec.1516meeting,whenitisexpectedtoraiseshorttermrates.
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"TheFedwouldwanttodoitwithminimalmarketimpact,"saidJohnBellows,portfolio
manageratWesternAssetManagementCo.inPasadena,California,whichhas$446

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billioninassets."Theyneedtodoitearlierratherthanlater."

For more visit Reuters.tv

IntheminutesoftheJulyFOMCmeeting,mostFedpolicymakers"thoughtthatitmightbe
besteithertowinddownreinvestmentsortomanagetheminamannerthatwouldsmooth
thedeclineinthebalancesheetinapredictableway."

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FundmanagersexpecttheFedwillrequesttheU.S.Treasurytoissuemoredebtforits
holdingsintheformof"addons"attheTreasury'smonthlyauctions,whichareadditional

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Auction"addons"areseenastheleastdisruptivetothebondmarketbecausethecentral

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TheTreasurycurrentlyholdssixauctionsoncouponbearingTreasuriesissueseach
month,inadditiontoasaleofTreasuryInflationProtectedSecurities.
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Thecentralbankmightalsoconsiderconductingopenmarketoperationslikeitdidduring
"OperationTwist"whereitannouncedwhattypeoflongertermTreasuriesitwouldliketo
buy.
InvestorsremainsomewhatcautiousonwhethertheFedwillachieveitsgoalofholding
downlongtermratesthroughitsTreasuriesreinvestment.
"Therearestillunknownshowthiswillwork,"saidMichaelArone,chiefinvestment
strategistatStateStreetGlobalAdvisors'U.S.IntermediaryBusinessinBoston,whichhas

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$2.4trillioninassets."ThisiscontributingtotheFed'sdesiretomoveataveryslowpace."
(Thisversionofthestorycorrectsparagraph2meetingdaystoTuesdayandWednesday,
insteadofWednesdayandThursday)
(ReportingbyRichardLeongEditingbyChizuNomiyama)
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Seetoday'saveragemortgageratesacrossthecountry.

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http://www.reuters.com/article/ususafedmarketstreasuriesidUSKBN0TU2AM20151211

30YearFixed

TODAY

1MO

3.87%

3.86%

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