Bond investors are gaining confidence that Federal Reserve Chairman Ben S. Bernanke will unwind the central bank’s unprecedented $3.3 trillion balance sheet without sparking a crash similar to 1994, when Alan Greenspan surprised the market by doubling benchmark lending rates in 12 months.
Though sovereign debt levels have more than quadrupled to $23 trillion, yields for 10-year Treasuries are 5 percentage points lower than they were in 1994 and forward measures show the current 1.74 percent level rising only to 2.04 percent in a year. Policy makers’ forecasts of no rise in the target interest rate for overnight loans between banks until 2015 are damping yields in a market dominated by the Fed’s $1.84 trillion, or 15.4 percent of the $11.94 trillion in marketable U.S. debt.
While BlackRock Inc. is trimming investments in longer-term Treasuries to protect against a rise in yields and Goldman Sachs Group Inc. invokes the memory of 1994, when U.S. bonds lost 3.35 percent as then-Fed chairman Greenspan didn’t prepare investors for the speed of rate increases, money managers from JP Morgan Asset Management Inc. to Fidelity Investments say this time will be different, in part because of Bernanke’s clearer and frequent statements on what would cause central bank policy to change.
“The Fed has been very transparent and their transparency should help offset the risks that were experienced in 1994,” Edward Fitzpatrick, money manager and head of U.S. rates at the JPMorgan unit in New York, which oversees $1.5 trillion, said in a telephone interview April 30.
“There are still hurdles, not the least of which is that they have to end the quantitative easing program before they would contemplate tightening,” he said. “The Fed will have time to craft their message well.”
Yields Rise
Yields on 10-year Treasuries, the benchmark for everything from corporate bonds to mortgages, rose to 1.74 percent May 3 after the Labor Department reported the jobless rate fell to 7.5 percent in April, from 7.6 percent the month before, as payrolls expanded by 165,000 jobs. The yield of the benchmark 2 percent note due in February 2023 was 1.74 percent, for a price of 102 9/32, at 8:27 a.m. New York time.
The Federal Open Market Committee said in a statement following a two-day meeting in Washington on May 1 that it will maintain its bond buying at the current monthly pace of $85 billion and is prepared to raise or lower the level of purchases as economic conditions evolve. Policy makers also left in place their statement that they plan to hold the target rate around zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
Most Fed officials don’t anticipate raising the benchmark rate until 2015, according to their estimates provided with forecasts released after the March 19-20 FOMC meeting.
Blankfein’s Concern