Treasury Bonds Fall as Japan Leader Chosen, Stocks Bounce Back
U.S. Bonds Decline; Traders Weigh Prospects for Reform in Japan
New York, July 24 (Bloomberg) -- U.S. bonds fell as traders fretted that
Japan's new prime minister may move to bolster the ailing economy,
reducing the allure of Treasury securities. ''After some months of
negative news out of Asia, there's a feeling that maybe it's going to
get better,'' said Livingston Douglas, president and chief investment
officer at Kiewit Investment Management in Omaha, Nebraska, which
manages about $4.5 billion.
bloomberg.com@@jilJ9gYAnty0jG@w/news2.cgi?T=news2_ft_topww.ht&s=561114922
Bonds declined after former Foreign Minister Keizo Obuchi, 61, won the
election to succeed Ryutaro Hashimoto as president of the ruling Liberal
Democratic Party, assuring he will become the country's next prime
minister when the parliament reconvenes on July 30.
The benchmark 30-year Treasury bond fell 13/32, or $4.06 per $1,000
bond, pushing its yield up 2 basis points to 5.68 percent. The two-year
note's yield rose 2 basis points to 5.46 percent.
Bonds briefly erased losses as U.S. stocks slumped, making less risky
government securities more appealing. Treasury securities slid again
when stocks bounced back. The Dow Jones Industrial Average was recently
up about 9 at 8942. ''It's a classic Dow trade: stocks do better, bonds
sell off. Stocks sell off, bonds do better,'' said Jeffrey Eglow, who
manages more than $250 million at Highlander Capital Management in
Parsippany, New Jersey.
While bonds fell, they're still on track to post their best week in more
than a month, gaining 30/32. Stocks meantime, turned in their worst
weekly performance since January. The Standard & Poor's 500 stock index
fell almost 4 percent.
Obuchi
In a press conference following his election victory, Obuchi reaffirmed
his support for additional spending and said thorough tax reform is
necessary. He had previously promised to cut more than 6 trillion yen
($42.55 billion) in taxes and boost spending by 10 trillion yen. ''The
market is pricing in some quick action on the Japanese economy, and
that's unsettled Treasuries,'' said Juli Collins- Thompson, a
fixed-income analyst at BNP Global Markets Research. Still, she's ''not
convinced that's likely to happen, and the market's moving a bit ahead
of itself.''
Any measures that help Japan's economy recover may reduce demand for
Treasuries, traders said. The slowdown in Japan and other Asian
economies prompted a rush into less risky U.S. government bonds in
recent months, pushing the yield on 30-year bonds as low as 5.56 percent
on July 7. That's the lowest since the Treasury began regular sales of
the securities in 1977.
Holding On
Some investors are still bullish on bonds, betting that any reforms in
Japan will take many months to produce results. ''Asia is much more
serious than most people believe,'' said David Kotok, who manages about
$400 million in assets for Cumberland Advisors in Vineland, New Jersey.
Kotok predicts U.S. economic growth may slow enough to prompt a Federal
Reserve rate cut, even though Fed Chairman Alan Greenspan's
congressional testimony earlier this week signaled no change in rates
for now.
Yesterday, Moody's Investors Service Inc. placed the Japanese
government's ''Aaa'' credit rating on yen and foreign
currency-denominated debt and bank deposits on review for possible
downgrade, citing ''deep, structural problems'' in Japan's economy. ''If
Japan can't get its act together, you're going to see a real calamity,''
which could spur gains in bonds, said Michael Hirsch, who helps run $5.6
billion in assets at Freedom Capital Management in Boston.
Reports
Some investors said the state of the domestic economy is more important
for U.S. bonds than the outlook for reform in Japan. A spate of reports
in coming days will provide more evidence on the pace of U.S. growth.
Those reports include the latest read on wages and benefits, economic
growth, housing, consumer confidence and manufacturing. Thursday's
reports on wages in the second quarter -- the employment cost index --
and Friday's report on the pace of U.S. growth in the three months ended
in June, will likely prove the most important for bonds, investors said.
The ECI probably rose 0.8 percent in the second-quarter after climbing
0.7 percent in the first quarter. Friday's report is expected to show
that the economy barely expanded in the second quarter, analysts said.
''The interesting question is: now that we had this weak second quarter,
is a rebound in the cards?,'' Douglas at Kiewit said. |
