Yields on US Treasuries are continuing to rise — despite the best efforts of the US to keep them down

From Alphaville:

"Rescuing banks, then Treasuries Posted by Tracy Alloway on Feb 09 15:47.

Yields on US Treasuries are continuing to rise — despite the best efforts of the US to keep them down.

Monument Securities’ Stephen Lewis has this to say about it today:
US policymakers need to take the Treasuries market’s behaviour seriously. Each basis point by which the market yields rise nullifies actions that the US Treasury and Federal Reserve are taking in other policy areas to stimulate the economy. If those actions, through their implications for the budget deficit, are the cause of the rise in yields, the US authorities need to be careful how they proceed.

Cue tomorrow’s announcement on the US’s bank rescue/stimulus plan. Any action will likely have an impact on treasury yields as well - and here the US needs to be careful. It could very well end up pushing yields higher — via its implications for the US budget deficit, etc. Back to Lewis:

It is entirely possible that a point might be reached where the loss would exceed the gains. That would set an effective limit to what the US authorities could do to support the economy. Any attempt to reflate the economy beyond that point would be as futile as an attempt to travel faster than the speed of light.

Mr Bernanke and some of his colleagues may believe they can circumvent this constraint by having the Federal Reserve hold down yields in the marketplace. If they initiate a strategy of Fed purchases of Treasuries in such circumstances, they will very likely find plenty of willing sellers. After all, investors will know for sure that, without the Fed’s intervention, yields on Treasuries would be higher, though they will not know how much higher. The Fed’s bid will, therefore, afford investors an opportunity to offload paper at above-market prices.

To keep yields steady, the Fed might well have to increase the scale of its purchases progressively, and eventually wind up holding most of the Treasury debt in issuance. This looks like a route-map to the destruction of financial markets and the establishment of a command economy.

Of course, if we’ve learned anything from the current crisis it’s that the Fed is already targeting asset prices. It’s not a command economy, but supply and demand is being manipulated. In any case, speculation that the Fed may have to start buying longer-term treasuries, as it’s been considering for some time now, is gaining pace.

Bill Gross, the man with the uncanny ability to direct the US asset purchases, has this (self-serving) tidbit to say about it this afternoon, via Reuters:

If the benchmark 10-year U.S. Treasury note is sold at a yield above 3 percent at an auction this week, that would increase the chance the Federal Reserve will buy longer-maturity Treasuries, the manager of the world’s biggest bond fund said on Monday.

Recommended reading for later this week: The prolific Willem Buiter on whether the US can sustain such a course of action.

Related links:
Fed lacks consensus on treasuries as yields rise - Bloomberg
Bond investors call Fed’s bluff - Naked Capitalism
To twist a treasury - FT Alphaville
Après moi, le déluge - John Kemp / LR"

Me:

Don the Libertarian Democrat Feb 9 16:35

Little did I know that when William Gross offered to work for free in Sept. for TARP, he had been taken up on his offer. The government isn't paying him anything and he's telling them what to do. I like and respect Gross, although I find that he is currently, as being noted, essentially trying to make shareholders and owners of bonds and toxic assets whole, at the expense of the taxpayers, which is the opposite of what I believe. That's because he believes that forcing investors to lose money is bad for investing, and, hence, bad for the economy. Much worse than taxpayers getting stiffed. After all, it isn't as if he's hiding this view. He's bellowing it out as loud as he can.

As for the Fed, something is amiss. Just when they were supposed to be making everything clear, they've got everybody wondering what the hell they're going to do about these bond yields, if anything.