Good News for Bernanke From Bond Market Is Bad News for Rates

By Daniel Kruger and Sandra Hernandez

April 7, Bloomberg

For the first time since December, the bond market is closing the credibility gap with Ben S. Bernanke and signaling its agreement with the Federal Reserve chairman that an economic collapse has been averted and that interest rates are bottoming.

Treasury yields rose 0.33 percentage point on average through April 4 from this year's low of 2.49 percent on March 17, according to Merrill Lynch & Co. indexes. The increase is the first since December, when the Fed cut its target rate for overnight loans between banks and said lower borrowing costs ``should help promote moderate growth.''

The Fed's unprecedented support for JPMorgan Chase & Co.'s takeover of New York-based Bear Stearns Cos. on March 16 is restoring confidence in Bernanke, who told Congress last week that ``monetary and fiscal policies are in train that should support a return to growth.'' Yields tumbled to the lowest levels since 2003 in the first quarter, when banks racked up $232 billion of losses and writedowns and the economy lost jobs.

``There is a sense of stability returning to the market,'' said John Hendricks, who helps oversee $137 billion at Hartford Investment Management Co. in Hartford, Connecticut. ``Bernanke's comments that there's a significant amount of monetary easing already in the system and you've got these other measures coming into play as well that should help the economy rebound in the second half.''

The turning point came when the Fed promised $30 billion to back New York-based JPMorgan's bailout of Bear Stearns, preventing the biggest collapse of an investment bank. The central bank lowered its pledge to $29 billion on March 24 after JPMorgan quadrupled the purchase price to about $2.4 billion.

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photo by Bloomberg