Treasury 30-Year Returns as Market Bellwether as Fed Policy Propels Trade

Bloomberg:

For the first time since the 1990s the U.S. 30-year Treasury bond is becoming the benchmark for the world’s biggest debt investors.

The Federal Reserve’s plan to buy $600 billion of U.S. government debt will focus about 86 percent of its purchases in notes due in 2.5 years to 10 years, leaving the so-called long bond as the security that most closely reflects market expectations for inflation. Since the Fed’s Nov. 3 announcement, the 30-year yield rose 0.28 percentage point, suggesting growing investor confidence in the central bank’s efforts to avoid deflation as the economy expands.

“The 30-year, with minimal Fed involvement, will become the bellwether issue for the bond market’s outlook on the economy and inflation,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

Trading in Treasuries due in 11 years and more tripled since July, compared with a 60 percent jump for all maturities, according to Fed data. Volume reached $65.7 billion in the week ended Nov. 10 among the 18 primary dealers that trade with the central bank, the largest amount since at least 2001.

The rise in 30-year yields to a six-month high of 4.42 percent on Nov. 15 shows traders expect Fed Chairman Ben S. Bernanke will head off deflation, which can stall recoveries by curtailing spending and investment, said Rohit Garg, an interest-rate strategist in New York at BNP Paribas SA.