Treasuries fell after the Federal Reserve announced plans to buy $45 billion of U.S. government debt a month and took the unprecedented step of linking stimulus measures to unemployment and inflation.
Thirty-year yields reached a one-month high after the Federal Open Market Committee said interest rates will stay low “at least as long” as the jobless rate stays above 6.5 percent and if inflation “between one and two years ahead” is no more than 2.5 percent. Break-even rates on 30-year inflation-index bonds, a measure of expectations for consumer prices over the life of the securities, climbed to the highest since September.
“The Fed is losing some of its credibility as an inflation fighter,” said Gary Pollack, who helps manage $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “They will allow inflation to go above the long-term target. That’s disappointing for the market.”
Thirty-year bond yields rose five basis points, or 0.05 percentage point, to 2.89 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It reached 2.9 percent, the highest level since Nov. 7. The price of the 2.75 percent security due in November 2042 dropped 30/32, or $9.38 per $1,000 face amount, to 97 7/32.
The break-even rate on the 30-year Treasury Inflation Protected Security rose as high as 2.58 percent.
The benchmark 10-year yield increased four basis points to 1.7 percent and touched 1.71 percent, the highest since Nov. 7.
Treasury trading volume rose today to the highest in more than a month. It climbed to $338 billion, the highest since Nov. 7, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It was $139 billion on Dec. 10, a two-week low. Daily volume has averaged $240 billion in 2012.
The latest move to buy more securities will follow the expiration at year-end of Operation Twist, a $667 billion program in which the central bank has swapped each month about $45 billion in short-term Treasuries in its holdings for an equal amount of long-term debt. The program kept the total size of the balance sheet unchanged, while the new purchases will expand it.
“The Fed is going to be as accommodative as they can until growth comes,” said Jay Mueller, who manages about $2 billion of bonds at Wells Capital Management in Milwaukee. “They are shoving people into taking riskier bets on the investment side, and they have been successful at it. How much they have affected the real economy is always a question.”
The Fed has held its benchmark interest rate in a range of zero to 0.25 percent since December 2008 to support economic growth. It dropped its September pledge to hold the rate at virtually zero “at least through mid-2015” as it adopted the inflation and unemployment-rate thresholds today.
“This greater clarity will help markets better predict how bond yields will behave,” Fed Chairman Ben S. Bernanke said at a news conference in Washington after the policy meeting.
A majority of FOMC officials don’t expect to raise the main interest rate until 2015, when they estimate the jobless rate, now 7.7 percent, will fall to between 6 percent and 6.6 percent. Unemployment probably will average 7.4 percent to 7.7 percent in the final three months of next year, officials forecast today, versus a 7.6 percent to 7.9 percent estimate made in September.
The Fed has pumped more than $2 trillion into the financial system since its first round of QE in 2008 without unhinging inflation as measured by its preferred gauge, the personal-consumption expenditures index.
The PCE index rose 1.7 percent in October from a year earlier, less than the central bank’s long-run goal of 2 percent, giving policy makers latitude to further debase the currency and U.S. assets. The broader consumer price index gained 2.2 percent, the Labor Department said Nov. 15.
“The ambiguity around the inflation target and the way it is worded gives the Fed a lot of latitude in setting policy relative to what inflation actually is,” said Scott Minerd, chief investment officer of Guggenheim Partners LLC, who oversees more than $125 billion from Santa Monica, California.
Treasury yields have fallen since the Nov. 6 presidential election amid a looming budget-deficit showdown that could push the economy into recession. If lawmakers can’t reach an agreement, $607 billion in automatic spending cuts and tax increases will start Jan. 1. Going over the fiscal cliff would cause the world’s biggest economy to contract 0.5 percent next year, according to the Congressional Budget Office.
Bonds pared losses earlier today after the U.S. sold $21 billion in 10-year notes to strong demand. The securities yielded 1.652 percent, the least since the July sale’s 1.459 percent, the lowest yield on record at a sale of the debt.
Indirect bidders, bought 24.2 percent of the notes, while direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 42.7 percent, the most since 45.4 percent at the July sale, a record.
The U.S. will sell $13 billion of 30-year bonds tomorrow.