Unwinding of risky bets boosts borrowing costs
WASHINGTON— U.S. Federal Reserve chairman Ben Bernanke said rising bond yields partly reflect an unwinding of leveraged and “excessively risky” investments, calling the tighter financial conditions “unwelcome” as monetary policy stays highly accommodative.
The Fed chief, in testimony before the Senate Banking Committee, said the increase in borrowing costs over the past two months is related to “better economic news,” Fed communications about tapering its $85 billion monthly asset purchase program and bond-market bets.
The unwinding of risky bets is “probably a good thing to have that happen although the tightening that’s associated with that is unwelcome,” he said in response to a question from the committee during his second day of congressional testimony.
Fed officials plan to reduce the pace of asset purchases over the next year if the economy performs in line with their forecasts, which see growth picking up through the end of 2013. The economy probably expanded less than 1 per cent in the second quarter, according to St. Louis-based Macroeconomic Advisers LLC, and a sustained rise in borrowing costs could threaten the four-year expansion.
Treasury yields fell Thursday as the 59-year-old Fed chairman held out the possibility that the Fed could delay tapering if the economy loses momentum. Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York, said the Fed probably will keep its tapering plans intact as concerns reflected in long-term rates ebb.
“To the extent it was an unwind of leveraged positions, that should be essentially a one-time event, so you kind of shook those positions loose and presumably that won’t happen again,” said Feroli, a former Fed economist. “They seem to have done now a pretty good job of separating tapering from tightening and if they keep that up, it should limit any change in expectations of forward rates.”
Fed officials have said that a reduction in the monthly pace of bond buying wouldn’t represent a tightening of policy, and that the benchmark interest rate will stay low after the purchases end.
The yield on the 10-year Treasury note rose to 2.53 per cent by midafternoon Thursday in New York from 2.49 per cent late Wednesday. Ten-year note yields touched a twoweek low Thursday after Bernanke told the House financial services committee that the central bank’s bond purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant.
The yield has risen from 1.93 per cent on May 21, the day before Bernanke said the Federal Open Market Committee may trim its bond buying in its “next few meetings” if officials see signs of sustained improvement in the labour market.