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Treasury ETFs Higher After Bernanke Says QE Not on Preset Course


Yields on 10-year Treasury notes dropped below 2.5% Wednesday morning after Federal Reserve Chairman Ben Bernanke said economic conditions will determine the future of the central’s bank’s bond purchases.

The iShares 20+ Year Treasury Bond Fund (TLT) was set for a higher open as yields declined after Bernanke’s prepared Congressional testimony was released.

“I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly,” Bernanke said.

“On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2%, or if financial conditions–which have tightened recently–were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer,” the Fed chief added. [Treasury ETFs in Focus on Bernanke, Inflation Data]

Treasury ETFs have rebounded somewhat recently after Bernanke last week said the Fed could keep interest rates low even if the job market improves. Low inflation is seen as providing cover for the Fed to keep short-term rates near zero.

Bernanke has been trying to separate the Fed’s quantitative easing, or asset purchases, from interest rates, Bloomberg reports.

“Bernanke has said the Fed may start reducing $85 billion in monthly bond purchases later this year, assuming economic growth meets the Fed’s predictions. At the same time, policy makers’ forecasts have indicated the federal funds rate won’t rise until 2015, long after Bernanke’s second term ends Jan. 31,” according to the report.

“The Fed’s bifurcated message will continue,” said Michael Gapen, senior U.S. economist at Barclays, in the article. “Their outlook is for an environment where we can start tapering — so a hawkish tone on tapering switching to a dovish tone on rate hikes.”

iShares 20+ Year Treasury Bond Fund

Full disclosure: Tom Lydon’s clients own TLT.

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