U.S. Investors Get Right Mix of Growth, Inflation to Buy Treasury Bonds
U.S. Investors Get the Right Mix to Buy Bonds: Rates of Return
New York, July 31 (Bloomberg) -- Investors say a slowing U.S. economy
and low inflation is just the mix they need to keep buying Treasury
bonds in coming weeks.
That's what they got today, even though a report showed the U.S. economy
grew faster in the second quarter than predicted by all but four of 29
economists surveyed by Bloomberg News. What cheered investors was proof
that prices are barely rising as the impact of Asia's financial crisis
sweeps across the country. ''While growth is above forecasts, inflation
is coming in lower than the scare levels'' that would snap this year's
bond rally, said Barbara Kenworthy, who helps manage $9.5 billion of
bonds at Prudential Investment Advisors in Newark, New Jersey. She's
holding more Treasuries than the index against which she measures her
portfolio's performance.
Kenworthy and others see 30-year bond yields falling to about 5.5
percent -- the lowest ever -- as the economy cools, inflation stays tame
and economic problems persist in Asia. The benchmark 30-year bond barely
budged today, with the yield unchanged at 5.72 percent.
Gross domestic product expanded at a 1.4 percent annual rate in the
April-to-June period. The result was above the expected increase of 0.2
percent, although much slower than the first quarter's 5.4 percent rate.
'Opportunity to Reload'
The inflation measure used in calculating GDP, known as the price
deflator, rose 0.9 percent, less than forecast. Stable prices are good
for bonds because inflation eats away at their value. The consumer price
index rose just 1.7 percent in the 12 months ended in June. ''The story
continues much the same -- one of strong growth and low inflation,''
said Lennart Carlson, who oversees $20 billion of bonds at Aeltus
Investment Management in Hartford, Connecticut. Carlson said if 30-year
Treasury yields rise to 5.80 percent, that would ''present an
opportunity to reload.''
Yields fell to 5.56 percent on July 7, the lowest since the government
began regular sales of the securities in 1977. Yields fell more than 65
basis points since October, when tumbling Asian financial markets sent
hoards of international investors to safer U.S. debt.
Now less demand from Asia is curtailing U.S. manufacturing, just as
cheaper products from the region keep prices from rising. ''In the end,
the slowdown in the U.S. economy that is the result of the Asian turmoil
will be a positive'' for bond investors, said Aeltus' Carlson. 'Not to
Go'
In part, that's because the Federal Reserve isn't likely to raise
borrowing costs unless inflation quickens, traders and investors said.
The central bank's so-called federal funds rate is now 5.5 percent,
where it was set in March 1997. ''Cheap imports have kept prices down
and it gives the Fed a reason not to go,'' said Ken Anderson, who helps
manage $17 billion in bonds at Evergreen Asset Management in Purchase,
New York, and also is loaded up on Treasuries.
Still, Anderson is among those concerned that a booming U.S. jobs market
and soaring consumer optimism may yet lead to faster inflation. Consumer
confidence stayed near a 30-year high in July, the Conference Board said
this week, while the unemployment rate is lingering near a three-decade
low. The July jobs report is due next Friday. ''Its still a battle,''
said Tom Seay, who manages $400 million of fixed-income investments at
Gradison-McDonald Asset Management in Cincinnati, Ohio. ''The U.S.
economy is extremely strong. I don't think the market as a whole offers
any value right now, and a long bond back over 6 percent wouldn't
surprise me.''
Eric Cheung, who manages $2.8 billion at Wilmington Trust Corp. in
Wilmington, Delaware, is more sanguine. He sees bonds trading in a range
between 5.65 percent and 5.75 percent and plans to buy corporate
securities in coming days. Cheung would also consider buying 30-year
Treasuries if yields rise above 5.75 percent. ''Although growth is
higher than people expected, it's substantially lower than in previous
quarters,'' he said. |
