Bond investors are losing confidence in the Federal Reserve’s pledge to keep benchmark interest rates at about zero into 2015 as the U.S. economy accelerates.

Concern the Fed will increase its target rate for overnight loans between banks next year is showing up in wider price swings for shorter-term securities. Volatility in five-year Treasuries rose above 10-year notes for the first time since 2011 and yields on two-year notes more than doubled in the past four months. As recently as last week, Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., was recommending debt with short maturities.

While speculation the Fed will reduce its $85 billion of monthly bond purchases as soon as this week has left bond investors with the worst losses since 1994, JPMorgan Chase & Co. financial models show the end to the central bank’s zero-rate policy would have an even bigger impact. Policy makers cut rates to records as the financial crisis mounted in 2008 and vowed to keep them there until the economy and employment shows sustained signs of recovery.

“There’s a bit of a discomfort level being priced into the market,” Erik Schiller, a principal and senior portfolio manager in Newark, New Jersey, for Prudential Financial Inc. which oversees more than $1 trillion, said in a Sept. 10 telephone interview. “Asset purchases have been an emergency measure and we are beyond the need for those measures, and the Fed will try to get more toward traditional policy.”

Summers, Yellen

U.S. bonds rallied today after former Treasury Secretary Lawrence Summers quit the race to head the Fed. Summers would have kept monetary policy tighter than Fed Vice Chairman Janet Yellen, who is being considered for the post, according to a Bloomberg Global Poll. Five-year notes outperformed longer- maturity debt on the increased prospects for monetary policy being kept easy longer.

The yield on U.S. 10-year notes fell 10 basis points, or 0.1 percentage point, to 2.78 percent at 9:13 a.m. New York time. The price of the benchmark 2.5 percent note due August 2023 increased 28/32, or $8.75 per $1,000 face amount, to 97 18/32, according to Bloomberg Bond Trader prices. Five-year yields slipped 14 basis points to 1.55 percent.

Treasuries have plunged 3.6 percent, the most in nine years, since Fed Chairman Ben. S. Bernanke said May 22 in Congressional testimony that policy makers could “step down” the pace of asset purchases if the employment outlook shows sustained improvement. Yields for 10-year notes touched 3 percent Sept. 6, the highest level since July 2011.

Bond Rout

Policy makers will decide at a two-day meeting starting tomorrow to reduce monthly purchases of Treasuries to $35 billion from $45 billion, according to the median of 34 responses in a Bloomberg News survey of economists. The Federal Open Market Committee will maintain mortgage-bond buying at $40 billion, the survey showed.

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