Long-dated US Treasuries soared in price and benchmark 10-year note yields fell to their lowest in over 60 years on Wednesday after the Federal Reserve said it will launch a new $400 billion bond purchase program. The Fed said it will tilt its $2.85 trillion balance sheet by selling shorter-term notes and using those funds to buy longer-dated Treasuries.
This will involve buying $400 billion of Treasuries in the six-to-30-year range by the end of June 2012, and selling an equal amount of debt with maturities of three years or less. "I'm kind of surprised, they seem to be a little more aggressive, trying to soak up all the long-term supply," said Anthony Cronin, a Treasuries trader at Societe Generale in New York.
Thirty-year bonds, the longest US debt maturity, soared over three points in price with yields dropping 22 basis points to 3.01 percent, the lowest since January 2009. Fed purchases will now absorb the vast majority of new long-maturity debt supply, with only around $3 billion to be left out of $42 billion sold per quarter, according to TD Securities.
The long bonds are the only issue that has not seen its yields test recent lows. They had yielded as low as 2.52 percent in December 2008. Benchmark 10-year note yields fell to new 60-year lows of 1.87 percent, down from 1.95 percent before the statement. The Fed hopes that lower longer-term interest rates will spur risk-taking by lenders as they seek higher yields through loans to companies and consumers, and so stimulate the sluggish US economy, which is threatening to tipback into recession.
The US central bank also said on Wednesday it will reinvest proceeds from maturing mortgage and agency bonds back into the mortgage market, an acknowledgement of just how weak conditions in the sector have remained. Analysts, however, have been skeptical over how effective the move will be.
"Whether this will create economic stimulus remains to be seen. It might have kind of limited economic impact," said Gennadiy Goldberg, interest rate strategist at 4Cast Inc in New York. A continued drop in housing prices has increased the number of homeowners that owe more than their homes are worth, and it is also not certain that many new buyers would be attracted to new purchases by lower rates. The yield gap between 2- and 10-year notes declined more than 20 basis points on Wednesday to 280 basis points, the tightest since early 2009.