By Aline van Duyn in New York and Ralph Atkins in Frankfurt Published: May 8 2009 01:05 | Last updated: May 8 2009 01:05 US Treasury yields soared on Thursday after a 30-year government bond auction saw poor demand, highlighting the balancing act facing central banks seeking to keep interest rates low while selling record amounts of debt. The investor appetite for relatively safe government bonds has diminished as US stocks have rallied on signs that the pace of the downturn has slowed. However, the rising rates threaten central banks’ efforts to encourage people and companies to borrow and thereby stimulate growth. The 30-year Treasury yield rose to 4.30 per cent on Thursday from 4.10 per cent the day before after bids at the government auction came at lower prices than expected. The 30-year Treasury is now at it highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts – which began in March – to keep yields down through direct purchases of government bonds. “It was a terrible auction,” said Tom Porcelli, economist at RBC Capital Markets. “In an environment where markets are pricing in a better macroeconomic backdrop, it is harder to sell bonds at low yields.” Mortgage rates have been following the government bond yields higher. A 30-year fixed-rate mortgage averaged 4.84 per cent last week, according to a Freddie Mac survey, compared with 4.78 per cent the week before. Earlier in the year, long-term mortgage rates fell to well below 5 per cent, following the Fed’s purchases of mortgage debt and Treasury debt, a strategy known as quantitative easing. This prompted a wave of mortgage refinancing. This can reduce monthly payments and has given many Americans more cash to spend or save. The lukewarm investor response to the sale of $14bn of US Treasury debt came after European central banks intensified efforts to combat recession. The European Central Bank cut its main interest rate by a quarter percentage point to 1 per cent, the lowest yet, and announced plans to buy €60bn of covered bonds, which are backed by mortgages or public sector loans. Separately, the Bank of England said it would pump a further £50bn ($75bn) into the UK economy through its programme of quantitative easing. Significantly, Jean-Claude Trichet, ECB president, said official eurozone borrowing costs could fall again. Several ECB governing council members had previously publicly opposed cutting rates below 1 per cent, and Mr Trichet had warned of the dangers of letting rates fall to zero. Mr Trichet insisted, however, that the ECB was “not embarking” on quantitative easing with its covered bond purchases. The ECB expects the liquidity it injects into the financial system by buying covered bonds to result in eurozone banks demanding less from the ECB’s financing operations – avoiding inflationary consequences. However, he was careful not to rule out any policy options – and analysts said Thursday’s moves pointed to a reduced resistance towards following the Federal Reserve and Bank of England in embracing “non-conventional” policies. Additional reporting by Chris Giles and David Oakley in LondonUS Treasury yields soar on poor demand
Friday 8 May 2009
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