By Ellen Freilich
NEW YORK Jan 4 Concern that the Federal Reserve
could reduce its purchases of debt securities later in the year
kept yields at eight-month highs on Friday, overshadowing a U.S.
employment report that showed steady, but lackluster, job growth
A stronger than expected Institute for Supply Management
non-manufacturing index also weighed on Treasuries prices.
Benchmark 10-year Treasury notes were down 3/32
in afternoon trade, their yields at 1.93 percent, up from 1.92
percent late on Thursday.
Bond prices have risen and yields have fallen since the
start of the year, responding to minutes from the Fed's most
recent policy meeting released on Thursday and to a last-minute
deal that U.S. lawmakers reached on January 1 to avoid a package
of tax hikes and spending cuts that would have crimped economic
The Fed minutes that disturbed the bond market portrayed Fed
officials as being more concerned about the potential risks of
the U.S. central bank's asset purchases on financial markets,
even as they continue an open-ended stimulus program for now.
"Far more important for the bond market than the employment
numbers was the reminder that just because the Fed will do QE
for a long time doesn't mean they will do the same amount of
QE," said UBS U.S. chief economist Maury Harris. "Whether the
Fed does $85 billion a month in QE or $45 billion a month makes
a big difference to the bond market."
In a surprise to Wall Street, minutes from the Fed's
December policy meeting, published on Thursday, displayed a
sense of caution about further increases in the central bank's
$2.9 trillion balance sheet, which it expanded sharply in
response to the financial crisis and recession of 2007-2009.
"Several (officials) thought that it would probably be
appropriate to slow or to stop purchases well before the end of
2013, citing concerns about financial stability or the size of
the balance sheet," the minutes said, referring to the narrower
group of voting Fed members.
"The bond market got very concerned about QE ending in
mid-2013," said Dan Heckman, senior fixed income strategist at
U.S. Bank Wealth Management in Minnepolis, referring to the
Fed's unconventional policy known as quantitative easing. "The
market was blindsided by that."
While the bond market does not think the Fed will halt its
purchases of debt securities well before the end of 2013, yields
have risen as traders mull the possibility of fewer purchases.
"Why should we assume the Fed will expand their balance
sheet by another trillion dollars this year?" Harris said.
When the Fed settled on $85 billion a month of purchases,
policymakers were worried about the potential repercussions of
going off the fiscal cliff, Harris said.
"Once you move into the springtime and the Fed sees the
economy is dealing with only a modest amount of fiscal
restraint, I think they will cut back on the $85 billion a month
amount," he said.
In December, the Fed announced it would extend its monthly
purchases of $40 billion in mortgage securities and also buy $45
billion in Treasuries each month.
A few of the voting members on the central bank's
policy-setting Federal Open Market Committee thought asset
buying would be warranted until about the end of 2013. A few
others highlighted the need for further large-scale stimulus but
did not specify an amount or time frame.
Fed officials generally agreed that the labor market outlook
was not likely to improve without further nudging from the
U.S. unemployment has come down steadily after hitting a
peak of 10 percent in late 2009, but remains elevated at 7.8
percent, according to the report the Labor Department released
News that the U.S. services sector in December grew at its
fastest clip in 10 months - rising to 56.1 last month from 54.7
in November - boosted by a rise in new orders was also negative
for Treasuries prices. A reading above 50 indicates expansion in