There's good news for investors worried over the future of the U.S. bond market. The impact may not be so bad, especially when the Federal Reserve will start to reduce its $2.46 trillion in Treasuries.
The effect in the U.S. market won't be as noticeable and bad as initially feared, states Bloomberg, despite the Federal Reserve's attempt to reverse previous easy-money policies. The concern was that the reverse in Fed's policies will trigger an increase in borrowing costs, after the Central Bank planned to reduce debt holdings sometime after it starts raising interest rates. However, experts at JP Morgan Chase & Co., stated that the yields would hardly budge even if the Feds won't buy bonds to replace the $216 billion in Treasuries due next year.
Wrightson ICAP LLC, a research firm specializing Fed policy and Treasury financing analysis, also agreed with JP Morgan's statement. Lou Crandall, chief economist at the research firm, said, "It would not have an impact, and that's the news here. Letting Treasuries run off is a freebie."
The Bloomberg report also mentioned that keeping a lid on yields is critical to both the investors and the U.S. government. Although it is most critical to the government, given its management of a debt load that has more than doubled to $18 trillion since the credit crisis. The implications will also extend to other governments, businesses and consumers around the world, since Treasuries serve as a global benchmark for trillions of dollars of debt.
The market concerns started after the Federal Reserve announced earlier this month that interest rates will increase beginning September, reports the Wall Street Journal. Although the Feds are confident that the economy is robust enough to handle the rate increase, the bond market remained skeptical. So far, the yields for short-term Treasury notes have started to move higher, but longer-term debt yields remained low.
Erik Schiller, senior portfolio manager at Prudential Financial Inc.'s fixed-income unit, said the Fed's decision to raise interest rates against sluggish global growth may be "premature." He added that enforcing a tighter monetary policy could "only help to slow the U.S. economy and pressure inflation expectations down." This would then lead to long term bonds being more attractive for investor, given that experts are foreseeing the 10-year yield to move towards 3 percent, from 2.211 percent, by end of this year.
