TIPS Give Bernanke Green Light to Ease Amid Record Yields
By Susanne Walker and Cordell Eddings - May 20, 2012 8:55 PM PT
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Bond traders are cutting expectations for U.S. inflation by the most since December, providing Federal Reserve Chairman Ben S. Bernanke the scope for additional stimulus as the central bank’s current effort winds down.
With six weeks left before the end of the Fed’s $400 billion swap of short-term debt for longer-term securities in a program known as Operation Twist, everything from yields on securities that protect against rising consumer prices to a measure of the outlook for inflation in the forwards market show diminished concerns. Traders are pricing in a 55 percent chance that the central bank will begin new efforts to spur economic growth, Bank of America Corp. says.
Enlarge image U.S. Federal Reserve Chairman Ben S. Bernanke
U.S. Federal Reserve Chairman Ben S. Bernanke. Photographer: Scott Eells/Bloomberg
Speculation has risen that the central bank may need to add to the $12.8 trillion already spent to avert a second recession in three years after reports showed jobs are growing more slowly than forecast and Bernanke said April 25 that the Fed remains “prepared to do more as needed.” For first time since it announced Operation Twist in September, the Fed’s preferred gauge of measuring traders’ inflation expectations is poised to fall for a second straight month.
“It’s not only a weak economy, but as inflation comes down, it could be another reason for the Fed to implement some more stimulus,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion, in a May 14 interview.
Record Low Forecast
Deutsche Bank’s investment banking unit and JPMorgan Chase Co. expect yields on the benchmark 10-year note will tumble to a record 1.5 percent this year, from 1.72 percent last week and this year’s high of 2.4 percent on March 20. The previous low
http://www.bloomberg.com/news/2012-05-21/tips-give-bernanke-green-light-to-ease-amid-record-yields.html
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