Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

U.S. Treasury Calms Bond Investors

RIO GRANDE, Puerto Rico -- A top Treasury Department official sought to assure bond investors on Saturday that they would be able to adjust to the government's new policy of reducing the supply of Treasury bonds.

The official, Lewis Sachs, assistant secretary of the Treasury for financial markets, also said Federal Reserve officials "are confident they will be able to conduct monetary policy" as well in the new environment as in the old.

The comments, made at the annual meeting of the Bond Market Association here, came after a week in which the bond market was roiled by news of a sharp decline in the issuance of 30-year Treasury bonds and by the rising prices and plunging long-term yields that resulted.

Many investors, including big Wall Street firms, had been betting that long-term interest rates would rise after the Federal Reserve raised its short-term interest-rate target in an effort to slow economic growth and forestall inflation.

But on Wednesday, the Treasury Department surprised investors with an announcement that the sale of 30-year bonds in May would be "significantly smaller" than current sales. Analysts estimated May sales at around $5 billion, about half of what had been expected.

Long-term prices soared and yields, which move in the opposite direction, plummeted as investors, learning of the planned reduction in the quantity of bonds to be issued, scrambled to buy. The yield on the benchmark 30-year Treasury bond fell to 6.28 percent Wednesday from 6.42 percent Tuesday, and Thursday, the rush to buy continued. The price of the 30-year bond jumped almost two full points and the yield fell to 6.13 percent.

But Friday, investors seemed to change sentiment, and as bonds were sold, the yield on the 30-year bond rose to 6.23 percent as selling predominated.

A strong January employment report, with nonfarm jobs rising by almost 400,000, contributed to the selloff. But some bond traders here said the market just had gone too far in one direction. Still, there is talk of big losses among major bond dealers. And the Federal Reserve Bank of New York on Wednesday denied a rumor that it was holding an emergency meeting to deal with financially troubled firms.

Sachs said the Treasury expects to pay off $300 billion of debt in the current fiscal year.

Sachs, who spoke at a panel here, was asked if the Treasury was committed to issuing long-term bonds, even as the need to borrow dwindled.

"I can't say what we will be doing years from now," he replied. "We don't have plans beyond that at this point." But he said the Treasury would "maintain liquidity in our benchmark issues as long as we can." Maintaining liquidity means ensuring that each new issue of bonds is large enough so that trades of large size will not distort prices.

The other matter on the minds of the traders and executives involved in the corporate, municipal, mortgage and government bond markets was what would replace prices and yields in the long-term Treasury market as the benchmark for the other fixed-income markets. It was clear there is a debate over what alternatives might work.

"At some point," Sachs said, "the debt of other issuers will become larger than ours, but that will not happen overnight." And he added, "While there will be a period of adjustment, we have every confidence the market will adjust and other instruments will replace the role the Treasury plays."