Barclays Capital expects Fed to buy Treasurys beyond 2Q

Barclays Capital expects the Federal Reserve will continue buying Treasury securities past the second quarter, although it appears investors feel otherwise as there has been considerable sell-off in long-term bonds this week. Analysts said Treasurys rallied ahead of the Fed’s recent announcement of its latest round of purchases – the $600 billion bond-buying plan known as QE2. And investors claim inflation fears and demand for assets backed by the dollar, which are being hurt by calls from foreign officials to place less emphasis on American currency, are driving yields higher. But Barclays Capital said “the most likely reason is simply that investors have scaled back their expectations of (the) Fed purchase,” and volume was light this holiday-shortened week. Agency mortgage-backed securities underperformed their Treasury duration hedges this week, according to analysts, who recommend staying overweight in Agency MBS and “believe the best execution is in lower coupons.” Meanwhile, nonagency MBS prices climbed this week after some weakness last month, according to Barclays Capital. Still, the analysts don’t expect “any near-term pricing effects,” from banks repurchasing troubled loans out of MBS “except in pockets where buybacks are currently happening.” Write to Jason Philyaw.