By Cynthia Lin Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–U.S. Treasury investors are increasingly doubting the Federal Reserve’s willingness to provide additional stimulus.
Despite renewed fears about the euro-zone debt crisis, recent gains in Treasurys have been modest. Those holding U.S. Treasurys are worried that come next week at the Fed’s April meeting, the central bank will disappoint by not referencing potential easing measures that could include a full-fledged bond-buying program or an extension of the current Operation Twist.
Easing options certainly still remain on the table, but it’s less certain now than a few weeks ago that the Fed will actually take the plunge. Today, investors are increasingly thinking the central bank won’t pump the tires of those expecting action.
“The end of Twist is around the corner, and the Fed will want to take pause until the last of the bond buying is done,” said Jeff Hussey, global chief investment officer of fixed income at Russell Investments. He sees an upward bias in Treasury yields and is opting to hold less Treasurys than that of his portfolio’s benchmark.
On Wednesday, after the Federal Open Market Committee’s two-day policy meeting, the Fed will publish its updated rate and economic forecasts, and Chairman Ben Bernanke will respond to questions from the press.
If the statement and Bernanke’s briefing shed no new light on potential easing, market analysts say bond investors will start gearing up for the end of Operation Twist, a stimulus effort scheduled to end in June. It involves the Fed selling short-dated Treasurys and using those proceeds to buy longer-term Treasurys in order to keep a lid on borrowing costs.
The impending end of “Twist” will put Bernanke on the hot seat Wednesday. Expectations for the Fed to offer more stimulus have declined since the March policy meeting, when policy makers came off somewhat more optimistic about the economy than before but didn’t take the possibility of further easing off the table.
With bond investors torn, 10-year Treasury yields are teetering around 2%, ready to break in either direction upon clearer guidance from the Fed.
“The press conference should be the most interesting part of the day,” says policy researcher Roberto Perli at the International Strategy and Investment group. “Bernanke could provide some important clues if reporters ask…about future policy, and they most likely will. The market could have some sizeable reaction.”
Strategists at Bank of America said to position for a selloff as the program winds down, seeing 10-year yields rising to 2.25%, from 1.959% late Friday. Interest-rate strategists at Barclays Capital recommend betting against three-year Treasurys to position for a potential hawkish surprise from the rate-timing forecast. As it stands, the Fed intends to hold the policy rate near zero at least until late-2014–this stance isn’t expected to change.
Not showing more inclination to provide more stimulus would be a slight negative for Treasurys since the Fed has become the largest single buyer in the market. Complicating the week, the Treasury Department is scheduled to sell $35 billion of two-year notes Tuesday, $35 billion five-year notes Wednesday and $29 billion seven-year notes Thursday.
“June is fast approaching, and there’s no doubt the Fed has really manipulated the Treasurys market,” said Jeffrey Elswick, director of fixed income at Frost Investment Advisors. “All else equal, yields can certainly move up on the long-end.”
Elswick’s funds are currently positioned for yields to tick a bit lower in the short term because of flight-to-quality buying driven by Europe, but then to climb steadily in the second half of the year.
-By Cynthia Lin, Dow Jones Newswires; 212-416-4403; cynthia.lin@dowjones.com
