(Bloomberg News) Wall Street's biggest bond traders are stockpiling Treasuries at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan this week to buy longer-term debt to spur the faltering economy.
The 20 primary dealers held $15.1 billion of Treasury securities due in more than one year as of Sept. 7, up from a $75 billion bet against the debt on May 6, Fed data show. The last time dealers bought bonds at such a rapid pace was between July 2007 and September 2007, as losses on subprime mortgages began to infect credit markets and the central bank unexpectedly cut interest rates.
All but one firm expects the central bank to announce some type of what traders call Operation Twist, according to a Bloomberg News survey, the latest step by the Fed in its four-year effort to keep the economy out of a recession. U.S. debt due in 10 years or more has returned 17 percent this quarter, the most since the last three months of 2008, as unemployment holds above 9 percent and growth slows.
"The problems are endless" for the economy, William O'Donnell, the head U.S. government bond strategist in Stamford, Connecticut at RBS Securities Inc., a primary dealer, said in a Sept. 13 telephone interview. "What will surprise people is how long this period lasts of very, very low rates."
Treasury 10-year note yields fell to a record 1.877 percent on Sept. 12, down from this year's high of 3.77 percent on Feb. 9. The yield dropped eight basis points to 1.97 percent at 9:17 a.m. in New York, according to Bloomberg Bond Trader prices.
Yields fell as evidence mounted that the economy wasn't responding after the Fed, led by Chairman Ben S. Bernanke, cut its target interest rate for overnight loans between banks to almost zero and purchased $2.3 trillion of bonds from November 2008 through June to drive down market borrowing costs.
The Organization for Economic Cooperation and Development cut its forecast for U.S. gross domestic product on Sept. 8 to 1.1 percent this quarter and 0.4 percent in the fourth. That's down from the prior estimate of 2.9 percent and 3 percent.
"The market is pricing in a reasonable probability of the Fed not being able to stimulate growth in any meaningful way," Shyam Rajan, an interest-rate strategist in New York at Bank of America Corp., a primary dealer, said in a Sept. 12 telephone interview. "On the margin every step helps. But is this a cure- all for the economy, doing Operation Twist? No."
Operation Twist gets its name from a policy conducted by the Fed in cooperation with the Treasury Department in 1961, when the central bank bought long-term securities as the government concentrated its issuance in shorter maturity debt.