Treasuries Price in QE3 as Barclays Says Traders Anticipate $500 Billion

Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben S. Bernanke to signal as soon as this week that the central bank will begin a third round of asset purchases to boost the economy, a scenario the world’s biggest bond dealers said is unlikely.

Barclays Plc said 10-year yields indicate traders have priced in $500 billion to $600 billion of Treasury purchases by the Fed. Citigroup Inc. said current rates can only be justified by more central bank bond buying or assuming the economy will shrink by 2 percent.

“The market is pricing in another round of large-scale asset purchases, looking for confirmation possibly as early as the Jackson Hole symposium” in Wyoming this week, Anshul Pradhan, a fixed-income research analyst at Barclays in New York, said in an interview last week. “The probability of that is low. If the Chairman does disappoint, then there should be a reversal in the outperformance of 10-year notes.”

Central bankers from around the world will meet in Jackson Hole at an annual conference sponsored by the Federal Reserve Bank of Kansas City, the same place where Bernanke triggered financial rallies a year ago when he said the Fed was prepared to “do all that it can” to ensure economic recovery and suggested it would purchase more securities if growth slowed.
Fed Dissension

Unlike then, when the Fed’s concern was deflation, investors anticipate faster inflation. In addition, a year ago Bernanke had the full backing of his board. Now, there is more dissension among policy makers than at any time since 1992.

The pressure is on the Fed as manufacturing weakens, consumer confidence tumbles and the unemployment rate holds above 9 percent. Citigroup and JPMorgan Chase & Co., who along with Barclays are among the 20 primary dealers of U.S. government debt that trade directly with the central bank, are cutting their forecasts for U.S. growth.

Slower expansion is translating into the best year for Treasuries since 2008, with gains of 7.67 percent through last week, Bank of America Merrill Lynch indexes show. That compares with 3.45 percent for the rest of the world’s sovereign debt market, based on the firm’s indexes.

The yield on the benchmark 10-year Treasury note, which helps set rates on everything from mortgages to company bonds, ended at 2.07 percent on Aug. 19, down from the high this year of 3.77 percent on Feb. 9. Ten-year notes yielded 2.08 percent today as of 6:56 a.m. in London.
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