Dec 12 2015

Rate Range Projection by Bank

Next week 120.50 to 124.00

Next 3 months 117.00 to 127.00

The Federal Reserve is expected to raise U.S. interest rates next week but that doesnt mean its disappearing from the bond market, and its ongoing presence there should hold down mortgage rates and corporate borrowing costs for years.

The Fed meets next Tuesday and Wednesday. While it will begin to raise rates, it has signaled it will maintain its balance sheet, which includes $2.5 trillion in U.S. government debt as a way of ensuring it has ample cash to support the economy.

More than $200 billion worth of Treasuries in the Feds portfolio are maturing in 2016, but the central bank is expected to reinvest those proceeds, rather than let them mature and roll off. It will likely wield considerable influence on longerterm Treasuries yields, mitigating negative effects from the rise in short-term rates, analysts and investors said.

Another $1.1 trillion in Treasuries will mature through 2020.

With the reinvestment process in the market, it will cap rates. It wont drive them down, but it would prevent them from rising too quickly, said Gemma Wright Casparius, senior portfolio manager at Vanguard, the largest U.S. mutual fund company in Malvern, Pennsylvania, with over $3 trillion in assets.

The Feds vast holdings stem from three rounds of bond purchases, or quantitative easing, which expanded its Treasuries ownership fivefold from the end of 2008.

Sources of demand including Fed reinvestments along with net issuance declining would keep long-end yields contained, said Gene Tanuzzo, portfolio manager at Columbia Threadneedle in Minneapolis, which has $471 billion in assets

While the pace of the Fed rate rises is still up in the air, the benchmark 10 year Treasuries yield will likely firm to 2.50 percent by the end of 2016, according to fund managers interviewed. If the Fed were not to reinvest in Treasuries, analysts projected the 10 year yield would shoot up to 3 percent.