Treasury yields rise as Fed intervention ends

All investors are warned that "past performance is no guarantee of future results" and such advice looms large over the US Treasury market as a spectacular year for owning boring old long bonds draws to a close. In characteristic low volume trading ahead of Christmas, the rise in long-dated Treasury yields last week has stood out with 30-year bond yields jumping back over 3 per cent from last December 19 low of 2.78 per cent. Higher yields, accompanied by tumbling prices, have occurred after the US Federal Reserve completed its final bond purchases under "Operation Twist" for this year. Temporary halt That temporary halt in Fed support only demonstrates the power of central bank buying in keeping long-term interest rates at low levels that, over time, are designed to stabilise the housing sector and ultimately boost the economy. There is no question that the Fed's purchases of long bonds that began in August have helped power substantial returns for bond investors with the Barclays Capital index of long-term Treasuries up 28 per cent this year, its best annual run since 1995. It is a performance very few on Wall Street expected this time last year when the 30-year bond was anchored around 4.50 per cent. Even by late July, the bond was only a touch lower in yield at 4.30 per cent. Real twist Then came the escalation in the Eurozone debt crisis and evidence of much weaker US growth that, in turn, compelled the Fed to start buying more Treasuries. But the real twist in the Fed's late summer policy for bond managers was that the central bank did not focus its efforts on the 10-year sector as many investors had expected. Instead, the Fed under Operation Twist is, in effect, removing 90 per cent of new 30-year bond issuance until its purchases end next June. Buying of that magnitude explains why the Fed's purchases are viewed by traders as having artificially lowered market yields by at least one 1 percentage point.