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The Fed says it will stay the course and bond yields keep moving up

posted on December 15, 2010 at 11:18 am
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Nothing surprising in the news from the Federal Reserve’s Open Market Committee yesterday. The Fed said its plans were unchanged and that it would buy $600 billion in Treasuries in the first six months of 2011 in order to stimulate the economy. The economy itself, the central bank said, was doing better but not better enough to cut unemployment or to change the Fed’s program of bond buying

Nothing new but Treasury prices still took it hard. Prices on the 10-year Treasury fell and the yield climbed to 3.4% as of 2:37 New York time. Prices on the 30-year bond fell and the yield rose to 4.51%.

Bond prices weren’t helped by a bigger than expected gain in retail sales in November of 0.8% also announced yesterday. Economists surveyed by Bloomberg had been looking for a gain of 0.6%. The Department of Commerce also revised October’s increase in retail sales up to 1.7%. If the economy is accelerating, bond investors would want higher yields to compensate for a greater risk of inflation.

On the technical charts Treasury bonds and notes have entered territory that usually leads to further declines in bond prices. According to John Murphy writing on StockCharts.com on December 14, the yield on the 30-year Treasury bond has moved above its 200-day moving average. Since bond prices go down when yields go up that’s not good for bond prices. The yield on the 10-year Treasury note has climbed over its 200-day moving average as well.

In separate but related news Moody’s Investors Service said that passage of the agreement between Congressional Republicans and the Obama administration to extend the Bush administration tax cuts would increase the chance that the credit rating company would put a negative outlook tag on the Aaa credit rating of the United States.

I’d assume that overseas investors would look for higher yields on Treasuries if the U.S. credit rating went down.

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  • ehsroha on 15 December 2010

    Hi Jim,

    How do you rate the correctness of statistics from http://www.shadowstats.com ?


  • livetoride on 15 December 2010

    My perspective: the patient (the U.S. economy) is still hemorrhaging in the emergency room, transfusions (QE1, QE2,…,QEx) being administered by Dr. Bernanke, while the doctors (Congress) who can perform the necessary corrective surgery are still at lunch, or on the golf course, or in bed with their constituents. The medical bill is simply getting bigger by the day, and the bondholders know it.

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