Spiking Yields Won't Deter Fed's Strategy

U.S. Treasury yields are surging. The 10-year note yield is now up 27 basis points on the session at 3.72%. Several factors are weighing on U.S. yields today -- the ISM report, coupled with the better readings in Europe and China, keeps the "green shoots" story intact. Various measures of the tensions in the financial markets have eased. There are anecdotal reports of portfolio shifts from fixed income to equities. There are of course also concerns about supply.

Back at the March FOMC meeting, the Federal Reserve decided to purchase $300 billion of Treasuries in the following six months. To date it has purchased a little less than half this amount. It has indicated it will buy seven- to 10-year maturities on Wednesday and two- to three-year maturities on Thursday. Next week it will make two purchases, four to seven years and 10 to 17 years.

Since the end of March, foreign central banks have bought nearly as much in Treasuries as the Federal Reserve. The Fed appears to have purchased a little less than $150 billion, while the Fed's Treasury holdings for foreign central banks has risen about $127 billion since the end of March.

The April FOMC minutes suggested that Fed officials are open to increasing its asset purchases, depending on financial and economic conditions. The 10-year Treasury yield is about 100 basis points higher than then it was when the Fed first announced its Treasury purchases. Many of the so-called bond vigilantes suspect that if yields continue to rise, the Federal Reserve will be forced to step up its purchases of Treasuries. Yet even those countries that are buying a larger fraction of this year's new issuance, such as the U.K. and Japan, have seen yields rise sharply. It is not clear that simply buying more Treasuries will hold down rates, if that is the main objective.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.