The biggest price swings in Treasury bonds this year are undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing rates and pull the economy out of the worst recession in five decades.
The yield on the benchmark 10-year Treasury note rose to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.’s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.
Government bond yields, consumer rates and price swings are increasing as the Fed fails to say if it will extend the $1.75 trillion policy of buying Treasuries and mortgage bonds through so-called quantitative easing, traders say. The daily range of the 10-year Treasury yield has averaged 12 basis points since March 18, when the plan was announced, up from 8.6 basis points since 2002, according to data compiled by Bloomberg.
“Volatility has increased dramatically and it seems to get more each day,” said Thomas Roth, head of U.S. government-bond trading in New York at Dresdner Kleinwort, one of the 16 primary dealers of U.S. government securities that trade with the Fed. “A lot of that has to do with uncertainty about whether the Fed will increase purchases of Treasuries. The market is looking for some change in the Fed’s plan.”
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The rise in borrowing costs in the face of record low interest rates, Fed purchases and a contracting economy is the opposite of the challenge Bernanke’s predecessor, Alan Greenspan, confronted when he led the Fed.
In February 2005, Greenspan said in the text of his testimony to the Senate Banking Committee that a decline in long-term bond yields after six rate increases was a “conundrum.” At the time, he was trying to keep the economy from overheating and sparking inflation. Now, Bernanke may be facing his own.