I think Galvin is right - the market is ready for 50 basis point hike get it over with and let the spring/summer rally begin.
Bloomberg:
Treasuries Fall a Fourth Day on Evidence of Faster Inflation
By Marianne Sullivan, Perri Colley McKinney and Al Yoon
New York, May 4 (Bloomberg) -- U.S. Treasuries fell a fourth
day after reports of rising labor costs and slower gains in worker
productivity boosted expectations the Federal Reserve will raise
interest rates a half-point on May 16.
``There's a perception that maybe the Fed's falling behind
the curve on inflation,'' said James Ho, who invests $4 billion at
John Hancock Funds in Boston. ``That will grow more and more'' if
the central bank doesn't raise rates more aggressively, said Ho,
who is keeping shorter-term notes in his portfolio because their
prices are hurt less as the Fed rates rise.
The most-actively traded 30-year bond dropped 3/8, or $3.75
per $1,000 face amount, to a price of 101 13/32 as its yield rose
3 basis points to 6.14 percent, an almost two-month high. The most
active 10-year note fell 6/32 to 100 17/32 and its yield rose 2
basis points to 6.42 percent. The two-year note, unchanged at a
price of 99 10/32 and a yield of 6.74 percent, outperformed longer-
dated Treasuries after investors saw value when its yield touched
a five-year high of 6.78 percent in early trading.
The two-year yield, which has risen 48 basis points in the
past four weeks, more than reflects the risk of a half-point rate
increase by the Federal Reserve, some investors said.
``The market is a bit oversold, and it will be hard for yields
to move much higher,'' said Kevin Kennedy, a portfolio manager at
SSB Citi Asset Management, who bought two-year notes yesterday for
the $30 billion in fixed income he oversees. The security became a
good buy when its yield rose above 6.75 percent, he said.
Greenspan Silent on Rates
Notes, whose yields rise more when the Fed raises interest
rates, fell less than bonds after Fed Chairman Alan Greenspan
spoke about risk management in Chicago. He didn't mention the
economy, which came as a relief to some analysts and investors.
``Because Greenspan did not say anything bearish . . .
there's been something of a rethink of monetary policy,'' said
Richard Gilhooly, a government bond strategist at Paribas Corp.
There is a feeling ``that if the Fed goes 50 basis points, they're
done'' raising rates for the time being, he said.
Some investors say a half-point increase in the federal funds
rate to 6.5 percent isn't a given.
``I'm still on the fence,'' said Raye Kanzenbach, chief
investment officer at Insight Investment Management in
Minneapolis, with $7 billion in assets. While ``the Fed has some
heavy lifting to do,'' he said Greenspan needs more compelling
evidence to raise rates by more than a quarter-point at a time.
Tomorrow's April employment report, as well as consumer- and
producer-price figures later in the month ``could still influence
what the Fed does on May 16,'' said Kanzenbach, who is only buying
Treasuries to meet requirements of his portfolios.
Accelerating Inflation
Longer-term Treasuries fell a fourth day after the Labor
Department said unit labor costs rose at a 1.8 percent annual rate
in the first quarter, above expectations for a 1.5 percent rise,
and after falling 2.9 percent in the fourth quarter. The report
also showed worker productivity rose a less-than-expected 2.4
percent in the first quarter.
After surging 10 basis points yesterday and about 48 basis
points in the past three weeks, 30-year bond yields have risen
enough to reflect the likelihood of a half-point increase ``and
these numbers just confirm that,'' said Claude Persico, an
economist at Dresdner Kleinwort Benson North America.
Concerns about growth and faster inflation have shaved the 30-
year bond's year-to-date return to about 6.4 percent, including
reinvested interest. In early April, those gains had topped 13
percent.
Employment Report Next
Many investors held off from making big bets on Treasuries
before tomorrow's job report, which may provide more evidence that
growth isn't slowing even after five quarter-point interest-rate
increases by the Fed since June. Trading of bills, notes and bonds
through 12 p.m. in New York totaled $18.1 billion, 52 percent
below the average Thursday in the second quarter of last year.
A majority of economists surveyed by Bloomberg News expect
the unemployment rate fell to 4 percent, from 4.1 percent in
March, and that the nation added 340,000 jobs in the month. Growth
in hourly earnings probably slowed to 0.3 percent, from 0.4
percent.
Bill Quan, a senior economist at Aubrey G. Lanston & Co.
expects the Fed to raise its target for overnight bank lending by
a quarter-point to 6.25 percent at the May meeting. Still,
economists at more than half of the 29 banks that deal directly
with the Fed expect a half-point rise, based on a Bloomberg News
survey conducted Friday.
The implied yield on the fed fund futures contract for June,
a gauge of expectations about the target rate, has risen about 17
basis points in the past two weeks to 6.45 percent, suggesting a
growing number of investors expect a half-point increase this
month.
A further quarter-point increase by the Aug. 22 Fed meeting
is reflected in the 6.81 percent implied yield on the September
futures contract. That yield rose 4 basis points today.
Faster Inflation
Yesterday, a Fed report cited ``moderate to strong growth''
across most of the nation, while government figures showed factory
orders rose a greater-than-expected 2.2 percent in April. Those
followed a series of reports the past three weeks showing wage and
consumer- and producer-price inflation accelerated.
The annual inflation rate through March rose to 3.7 percent,
up from 1.8 percent in the year-earlier period. That puts the
inflation-adjusted 30-year bond yield at 2.45 percent, more than
1.3 percentage points lower than at the end of last year.
Long-term Treasuries that have benefited from low inflation
and the Treasury Department's $30 billion plan to repurchase bonds
are now ``vulnerable,'' said John Hancock Funds' Ho. Since 30-year
debt has outperformed this year, it may also have the most to
lose, he said.
``We know what's coming in the buybacks so there won't be
anymore positive surprises'' from the Treasury, Ho said. ``That
takes some juice out'' of buying in government bonds.
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Best Regards, J.T. |
