Bonds off after talk of rate cuts, Fed moves Fed futures show more expecting ease in policy after Bernanke speaks
By Deborah Levine, MarketWatch Last update: 4:10 p.m. EDT Oct. 7, 2008 Comments: 12 NEW YORK (MarketWatch) -- Treasury prices fell Tuesday, pushing short-term yields up for the first time in a week, after Ben Bernanke hinted the Federal Reserve is open to lower interest rates and the central bank moved to purchase commercial paper to ease corporate borrowing costs and bring relief to crippled credit markets. Ten-year note yields (UST10Y: U.S. Treasury 10 Year News, chart, profile, more Last: 3.48+0.02+0.52% 3:35pm 10/07/2008 Delayed quote data Add to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: UST10Y 3.48, +0.02, +0.5%) rose 2 basis points, or 0.02%, to 3.48%. Bond yields move inversely to prices. The commercial-paper funding facility unveiled by the Fed is intended to make investors more comfortable holding commercial paper -- short-term debt that companies use to fund operations. Funds and other investors pulling out of commercial paper lately have caused interest rates for companies, particularly financial firms, to spike higher or made it impossible to issue debt to replace maturing paper. See full story. "By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial-paper obligations, this facility should encourage investors to once again engage in term lending," the Fed said in a statement. By stimulating investor demand, rates on commercial paper should fall from what the U.S. central bank called "elevated levels." The Fed will buy the commercial paper at a spread above the three-month overnight indexed swap rate, the average expected overnight fed funds rate over that term. As an example, the Fed said the spread it will pay above the OIS may be 100 basis points. That would put the offer at 2.40%, said Ray Stone, co-founder at Stone & McCarthy Research Associates. In recent days, three-month commercial paper issued by financial companies rated AA have traded around 4.5% he said, making the Fed's purchase "welcome relief." Moreover, the facility should foster issuance of longer-term commercial paper, the Fed said. The U.S. commercial paper market has shrunk by 5.6% to $1..6 trillion last week. "The economy has been experiencing the equivalent of a stroke as short-term funding has been completely blocked," said T.J. Marta, fixed-income strategist at RBC Capital Markets. "This endeavor should largely eliminate the blockage that we had expected would continue through year-end if policy makers did not act. "This action will help mitigate the risks of an even sharper deterioration in the economy," he said. Bets on rate cuts Fed funds futures still show traders are betting the central bank will lower its target interest rate by a half percentage point by the end of the month. On Monday, traders had priced in odds for a 75-basis point cut from the current 2% rate. Futures also show a 58% chance of another 50-basis point cut by the end of the year. Merrill Lynch now expects the Fed to cut rates to 1% this year, economist David Rosenberg wrote in a note. "We see this easing as necessary just to offset the contractionary effects from the tightening in financial markets over the past month," he said. Rosenberg forecasts two-year note yields will drop below 1% by early next year, while 10-year yields will get below 3% by mid-2009. Treasurys pared losses after Fed Chairman Ben Bernanke said that policymakers should rethink its neutral stance towards monetary policy. See The Fed. http://www.marketwatch.com/news/story/treasurys-fall-after-talk-fed/story.aspx?guid=%7B2702ECA4-391C-4288-8413-4FE91D5AF57A%7D&dist=msr_6 Get your new Email address! Grab the Email name you've always wanted before someone else does! http://mail.promotions.yahoo.com/newdomains/sg/
