Investors keyed into any hints from central bank about future action
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices gained Tuesday, pushing yields lower, ahead of the latest decision by the Federal Reserve on interest rates and other possible measures to boost the economy.
A small proportion of analysts and investors expect the Fed to announce a new asset-buying program when the decision is announced by the Federal Open Market Committee at 2:15 p.m. Eastern time.
Yields on 10-year notes (UST10Y 2.66, -0.04, -1.55%) , which move inversely to prices, fell 5 basis points to 2.66%. A basis point is 0.01%.
Yields on 2-year notes (UST2YR 0.46, -0.01, -1.72%) declined 2 basis points to 0.45%, a hair above their lowest level ever.
Investors will watch for any hints that the policy makers are turning more serious about considering another round of so-called quantitative easing -- dubbed “QE-2” in financial markets. Read more about expectations of the Fed.
“I lean toward no action due to recent data stabilization, but it is a closer call in my mind than many others,” said Bill O’Donnell, head of Treasury strategy at RBS Securities.
“Yields could fall substantially on the immediate reaction to an actual QE-2 announcement,” he said, because that would surprise the market.
But bond yields may not rise dramatically if the Fed doesn’t take that step at this meeting, because investors don’t expect the FOMC to do so now. They also anticipate that bond purchases will be needed some time in the near future.
“The wall of cash on backups remains, and if they do not enact QE-2 the market will still feel it is possible between now and November,” O’Donnell said.
However, the last time the Fed decided to announce it would buy Treasurys -- $300 billion of them -- the market wasn’t expecting it so soon. The Fed’s announcement on March 18, 2009 caused 10-year yields to plunge 47 basis points -- the biggest drop since the stock market crash in 1987.
The FOMC isn’t expected to change policy on interest rates, already at historic lows.
Bond prices briefly pared gains after a government report showed U.S. housing starts jumped to a 598,000 annualized pace in August, more than economists expected. Read about housing starts.
