U.S. Bonds Fall as Rise in Manufacturing Orders Fuels Inflation Concerns
By Perri Colley McKinney and Wes Goodman
U.S. Bonds Fall on Report Manufacturing Orders Rose (Update5)
(Adds investor comment in 2nd section. Updates prices.)
New York, Sept. 29 (Bloomberg) -- U.S. government bonds fell
for a third day after a report showed manufacturing orders
unexpectedly rose in August, suggesting the economy is still
strong enough to stoke inflation.
``We've got an economy hitting on all cylinders,' said
Steven Bohlin, who manages $1.9 billion at Thornburg Management
Co. in Santa Fe and is buying money market securities so he can
reinvest quickly if yields rise. ``I see bond yields rising to at
least 6 1/4 percent by year end.'
Bond yields rose 4 basis points to 6.12 percent, lifted as
the price of the 30-year security fell 1/2, or $5 per $1,000 face
amount, to 100 1/32. Yields on two-year notes rose 4 basis points
to 5.68 percent, also hurt as the Treasury's $15 billion note
sale today drew demand away from outstanding securities.
Concern inflation will accelerate has driven bonds down 9.3
percent this year, including reinvested interest. Investors sold
bonds today, fearing faster inflation will eat into their fixed
payments, after the government said orders for big-ticket goods
climbed 0.9 percent last month. Analysts had predicted a drop,
following July's 4 percent gain.
A bigger risk to investors in longer-dated securities is
that the Fed won't raise rates enough to contain inflation. The
yield gap between 2-year and 30-year Treasuries has widened 12
basis points to 44 basis points in the past month, indicating the
two increases the Fed instituted in June and August haven't
slowed growth sufficiently to dispel inflation concerns.
Rate Expectations
After subtracting for a U.S. inflation rate of 2.3 percent
in the year to August, 30-year bonds pay investors 3.79 percent.
That's below the 4.07 percent average for the past five years,
driving some investors into corporate debt for its higher yield.
The yield on the October fed funds futures contract, the
market's closest measure of expectations for next Tuesday's Fed
policy meeting, rose 1 basis point today to 5.29 percent. That's
not enough above the Fed's 5.25 percent target for overnight
lending to suggest widespread expectations for a rate increase.
A Bloomberg News survey came to the same conclusion about
next week's meeting. Twenty-seven of the 30 biggest bond firms
expect the Federal Reserve to keep interest rates on hold. One
firm, SG Cowen Securities Corp., wasn't available to respond.
The yield on the fed funds futures contract for February, at
5.44 percent, does suggest another rate increase is expected by
early next year.
``The Fed's not necessarily out of the way,' said Steve
Vielhaber, director of fixed-income at TradeStreet Investment
Associates in Los Angeles, which has about $75 billion of bonds
under management. ``Growth is key. If we see continued sustained
growth' the Fed could raise rates again, even before year-end.
Vielhaber favors mortgage, corporate and agency securities
for their fatter yields than Treasuries.
Thornburg's Boehlin expects another Fed rate increase this
year.
Dollar Benefit
Treasuries got a lift in early trading as the dollar gained
for a fourth day against the yen, clawing back 3 percent and
leaving its decline for the quarter at 12 percent. Those losses,
which cut into the value of Treasuries purchased with yen, have
raised concern foreign demand for U.S. government bonds would dry
up because Japan is the largest overseas buyer.
The dollar traded at 106.96 yen at mid afternoon, from
106.49 yesterday.
Bonds yesterday fell more than a point in their biggest
decline in a month. They plunged as gold futures posted their
biggest gain on record, rising to more than $300 an ounce for the
first time in a year from $255 at the start of last week.
With other commodities, notably oil, also on the rise and
the dollar falling, U.S. manufacturers may soon be forced to pass
their rising materials costs on to consumers. Crude oil rose to
$25 a barrel today, the highest price since January 1997.
``Commodity prices are likely to remain firm, making for
strong U.S. inflation, which is negative for bonds,' said Jun
Fukashiro, a fund manager in the Tokyo pension division of NCB
Investment Management Co., which handles 650 billion yen ($6.1
billion) in assets. Fukashiro said he wouldn't buy U.S bonds in
September or October.
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