WORLD BONDS-U.S. to underperform near term
08:50 a.m. Feb 24, 1999 Eastern
LONDON, Feb 24 (Reuters) - U.S. Treasuries, already looking weak relative to
European bonds, will continue to underperform in the wake of Fed Chairman Alan
Greenspan's latest testimony, analysts said on Wednesday.
The 10-year T-note/Bund yield spread, currently at 130 basis points, could widen
to record levels around 150 b.p. over the next few weeks.
In the first day of his Humphrey-Hawkins testimony on Tuesday, the U.S. Federal
Reserve chairman was neutral on the outlook for interest rates, saying the Fed must
be ready to move policy quickly in either direction.
But his comments that the U.S. economy might be overstretched and stock prices
overvalued gave rise to concerns about a possible interest rate rise further down the
line and prompted a sell-off in the Treasury market.
By contrast, European bonds are supported by weak economic growth in Europe
and a possible cut in euro-zone interest rates.
''Really Greenspan is trying to jawbone the U.S. Treasury market lower,'' said
James McKay, global market strategist at the Commonwealth Bank of Australia.
''If the bond market sells off, it is tightening policy for him and he doesn't have to
raise interest rates which would probably cause further problems in emerging
markets and destabilise the forex market.''
He said Treasuries would continue to fall and saw the U.S. 30-year long bond
trading in a 5.50 to 5.75 percent yield range over the next month or two.
The long bond currently yields 5.45 percent and has not closed above 5.50 percent
since late August.
Graham McDevitt, head of bond strategy at Paribas in London, said the momentum
of the spread was driven by a clear fundamental divergence which now had strong
technical backing.
''From a technical perspective the break above 120 b.p. on the spread, which has
been threatening for the last month, has now clearly taken place and we should now
see that spread widening accelerate towards the 140, 150 b.p. area over the next
two to four weeks,'' he said.
But further out analysts said the spread should turn lower.
Chris Golden, senior economic adviser at Flemings Investment Management in
London, favoured U.S. Treasuries, saying they looked particularly cheap now.
He said the market has probably read too much of a bearish view into Greenspan's
testimony, in particular his comment that the Fed must continue to evaluate whether
the full extent of the rate cuts in the last quarter of 1998 remained appropriate to the
market.
''The actual policy report to Congress, as opposed to just his testimony, is quite
clear that the Fed does not consider the credit conditions it was addressing via its
rate cuts...have in fact come back to the state that they were in when those rates
cuts were deemed necessary,'' Golden said.
He said by and large Greenspan was saying there was no need to change present
conditions, not that there was any significant increase in the likelihood of the Fed
raising rates.
Commonwealth Bank's Mckay said if the U.S. economy slowed -- possibly on the
back of a stock market slide -- the U.S./German yield spread could contract quite
quickly.
((International Bonds +44 171 542 4041, Fax +44 171 542 5285,
uk.governmentbonds.news+reuters.com))
Copyright 1999 Reuters Limited. |
