Long-dated US bond yields approach highs
By Michael Mackenzie in New York
Published: May 28 2008 21:14 | Last updated: May 28 2008 21:14
Long-term US Treasury yields approached their highest levels since the start of the year on Wednesday, which will keep mortgage rates elevated at a time when falling housing prices show little sign of moderating.
Yields on the 10-year note neared 4 per cent as the latest durable goods data suggested that the US economy was growing slowly but had avoided falling into a recession at this juncture.
A surge in food and energy prices is also fanning fears about inflation, and, reflecting this, the bond market places the odds of a Federal Reserve rate hike by the end of October at about 50 per cent.
“The fundamentals are turning against the bond market,” said John Spinello, Treasury strategist at Jefferies & Co in New York. Concern about higher inflation, he said, had compelled investors to scale back their buying of long-dated Treasuries and European government bonds.
On Wednesday Treasury yields tested their highs after orders for non-defence capital goods excluding aircraft rose 4.2 per cent. This barometer of business equipment spending fell 1 per cent in March and the April number was the best result since December.
Stephen Stanley, chief economist at RBS Greenwich Capital, said the data were “yet another sign that the economy is not in great shape but the worst-case scenario is being avoided”. He expects the economy will “muddle through for the rest of the year, as the negatives of housing, energy prices, credit tightening, and labor market weakness are partially offset by fiscal and monetary stimulus.”
Mr Spinello said US Treasury yields were holding at recent highs and there was some reluctance among speculative investors to keep selling at the top of the market’s trading range.
Ahead of a $30bn auction of new notes on Wednesday afternoon, the yield on the two-year remained under its recent ceiling of 2.60 per cent. The yield has risen from a low under 1.30 per cent since March, while the 10-year yield has advanced from about 3.30 per cent.
Mr Spinello expects the market to hold at current levels until the end of the month. But, with $19bn five-year notes being sold on Thursday, there was a risk that new debt supply could compel further selling and higher yields, he said. |
