The Curve

I usually don't simply copy and paste articles from the Wall Street Journal (I leave that to those who run my desk at my real job), but Today's Wall Street Journal "Credit Market's" column speaks to my arguments about the yield curve. Besides, I have a mild concussion and have to do as little thinking as possible (maybe I should run for office?). The article notes how the Fed's decision to keep short-term rates low has hurt the prices of long-term bonds and helped the prices of TIPs. Be careful when buying TIPs because when the Fed does tighten, inflation pressures will abate, somewhat. The steepening yield curve is bad for LIBOR-based floaters. This would be a buying opportunity for such floaters as they should do better when the Fed does tighten and the curve flattens, eventually, but these preferreds are already too rich. Here is the article:

By MIN ZENG
Prices of Treasurys with longer maturities fell after the Federal Reserve reiterated its commitment to keep rates at record lows for an extended period, disappointing some investors and fanning worries that low rates may fuel inflation.
But prices of short-dated Treasurys, the most sensitive to official rate changes, gained, and traders pushed their expectations for the first rate increases into the summer of next year.
In the run-up to the Fed's statement, there had been expectations that policy makers might use a change in language to signal to markets that, with the economy on the mend, they were moving toward tightening policy. "The market got a bit ahead of itself pricing in possible changes in the Fed language," said Ian Lyngen, senior government bond strategist at CRT Capital Group.
The Fed's unchanged stance hurt longer-dated Treasurys as investors worried that the ultralow rates will fuel inflation. An additional concern for investors: record debt supply coming up next week, when Treasury sells a total of $81 billion in notes, up from the previous record of $75 billion.
The Treasury Department is scheduled to sell $40 billion in three-year notes, $25 billion in 10-year notes and $16 billion in 30-year bonds to cover its fourth-quarter funding needs.
On Wednesday, the benchmark 10-year note was down 20/32 point, or $6.25 per $1,000 face value, at 100 20/32. Its yield rose to 3.548% from 3.473% Tuesday, as yields move inversely to prices. The 30-year bond was down 1 22/32 points to yield 4.439%. The two-year Treasury gained 1/32 point to 100 6/32, lowering its yield to 0.905%.
Treasury inflation-protected securities outperformed plain-vanilla, or nominal, bonds as inflation expectations increased, measured by a widening yield spread between a 10-year TIPS and a 10-year nominal Treasury note. The spread widened to 2.12 percentage points. It suggests investors expect an average annualized inflation rate of 2.12% within a decade. That still is lower than the 2.50% expected before the collapse of Lehman Brothers.
Separately, the Fed scaled back one of its asset-purchasing programs. The Fed said it would buy $175 billion of agency debt -- issued by Fannie Mae and Freddie Mac -- less than the $200 billion the Fed had said it would buy. The Fed said the reduction reflected the limited availability of agency debt. Still, yield premiums on agencies -- as such debt is known -- widened over Treasurys by 0.03 to 0.05 percentage point in response to the Fed's announcement.
Debt Ceiling Seen Later; No More 20-Year TIPS
The Treasury pushed back the date it expects to hit the $12.1 trillion U.S. public debt ceiling to mid-to-late December, taking pressure off Congress to raise the limit. However, it noted "the government's cash flows are volatile and forecasting a precise date is difficult." Treasury Secretary Timothy Geithner has requested that Congress increase the ceiling. The U.S. public debt stood at $11.92 trillion Monday. Meanwhile, the Treasury announced plans to sell $81 billion in new securities next week to refund $38.5 billion in maturing issues and raise $42.5 billion.—Meena Thiruvengadam
Write to Min Zeng at min.zeng@dowjones.com