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Treasuries Price In $500 Billion, Anticipate QE3

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As central bankers prepare for their annual confab in Jackson Hole, Wyo., later this week, Barclays says traders have already priced in $500 billion to $600 billion of Treasury purchases by the Fed. But analysts interviewed by Bloomberg say it’s unlikely an announcement will happen, which will result in a reversal of this outperformance of 10-year notes.

The news service reports “Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben 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.”

Bloomberg also quotes a Citigroup report that says current rates can only be justified by more central bank bond buying or assuming the economy will shrink by 2%.

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

Last August, Bernanke said that inflation should remain “subdued for some time, with low risks of either a significant increase or decrease from current levels.” Heading into this year’s conference, investors predict a faster rise in inflation. Bernanke is also dealing with dissension among board members as to the steps to take to combat high unemployment and renewed fears of recession.

Bloomberg notes “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.”

Read about the historic prices of the benchmark 10-year treasury on AdvisorOne.