Fed's plan pushes short-term Treasurys higher

The Associated Press
Wednesday, November 3, 2010; 6:07 PM

NEW YORK -- The Federal Reserve unveiled its plan to boost the economy by buying bonds Wednesday, and the bond market got the message.

The Federal Reserve said it will buy an extra $600 billion in Treasury bonds through June of next year, a slightly larger plan than what many expected to see. The Fed's move is meant to encourage spending and ultimately lead companies to begin hiring again.

"Bottom line: The Fed delivered more than the market expected," said David Ader, head of government bond strategy at CRT Capital. "Both in terms of size, $600 billion, and longevity. This is not a month-by-month review. We now have eight months ahead of us where we know the Fed will be buying."

Most on Wall Street had been banking on a $500 billion plan to start, with $100 billion rolled out from month to month.

Goldman Sachs stuck to its forecast that the Fed would wind up spending a total of $2 trillion and expand the program into 2012. In an afternoon conference call, Jan Hatzius, Goldman's chief U.S. economist, said the Fed's move would fail to stop the unemployment rate from reaching 10 percent next year. The current package may add half a percentage point to economic growth.

"It's not going to be a panacea," Hatzius said. "Recovery is going to take a while."

Goldman has calculated that it would take $4 trillion from the Fed to get unemployment closer to 5 percent.

Traders also expected the Fed to weigh economic data each month before buying more bonds. Instead, the Fed made a firm pledge to buy $75 billion each month.

In late afternoon trading, the yield on the five-year bond fell to 1.11 percent from 1.16 percent late Tuesday. The two-year yield slipped to 0.34 percent from 0.35 percent the previous day. The yield on the 10-year hit 2.58 percent, compared with 2.59 percent the previous day.

The Fed's New York branch released a statement adding details to how the bond-buying would work.

The bank would aim 86 percent of its purchases at Treasurys coming due in the next two to ten years. The Fed said it would only direct 6 percent of its purchases toward bonds maturing between 10 and 30 years.

Why's the Fed targeting this range? Ader said it's because the yields on these bonds have the greatest impact on consumers, through rates on credit card debt and mortgages.

"Real people are affected by these intermediate yields," Ader said. "Your 30-year mortgage rate keeps closer to a 10-year than a 30-year."

These bond-buying details hit the 30-year Treasury, knocking its price to $96.93, a drop of $2.00 on the day. The yield on the so-called long bond climbed to 4.05 percent from 3.93 percent late Tuesday. Speculation had grown in the bond market this week that the Fed would take aim at 30-year bonds.

Treasury prices were rising and yields falling ahead of the announcement. In the half hour beforehand, the 10-year note was trading at 2.53 percent and the 30-year at 3.86 percent.

In the Treasury bill market, the three-month T-bill paid a 0.12 percent yield at a 0.13 percent discount.

© 2010 The Associated Press