Jump in 30-year Treasury yield raises expectations of Fed purchases

NEW YORK (Aug 31) - Investors are raising expectations the Federal Reserve will act to tame an upturn in yields by expanding its purchases of long-dated Treasury bonds, after the U.S. central bank said it would allow inflation to run higher.

Yields on 30-year U.S. Treasury bonds US30YT=RR hit a two-month high on Friday. Rising yields are a potential problem for the Fed as they raise the cost of borrowing for companies and individuals and threaten economic growth.

Some investors said the central bank may need to address the possibility of buying longer-dated debt at its mid-September policy meeting, if not sooner. Investors had previously expected the Fed to introduce the policy by the end of the year.

“The Fed cannot afford to have long rates go up significantly because it would undo everything they have been doing for the past six months,” said Gershon Distenfeld, co-head of fixed income at AllianceBernstein.

The Fed has purchased nearly $2 trillion in Treasury debt since the start of the coronavirus pandemic - bringing its current holdings to roughly $4.36 trillion - in order to keep interest rates low and maintain market liquidity. The majority of those purchases have been in shorter-dated notes.

Reuters