marginmike, bonds weekly largest drop in 18 months certainly validate your inflation argument:
From Bloomberg:
U.S. Bonds Fall After Stronger-Than-Expected April Jobs Report
By Marianne Sullivan, Al Yoon and Perri Colley McKinney
New York, May 5 (Bloomberg) -- U.S. Treasuries sustained the
biggest weekly loss in 1 1/2 years as a report the unemployment
rate fell to a 30-year low and wages rose fueled expectations the
Federal Reserve will raise interest rates a half-point.
``Have we seen the lows in (Treasury) yields for the year?
It's entirely possible,'' said Todd Finkelstein, who this week
sold long-term zero-coupon Treasuries, among the most vulnerable
securities to rising rates, from the $300 million he helps invest
at Boston Advisors Inc. ``You need good news on inflation for a
bond rally, and we're not seeing it.''
The most-actively traded 10-year note fell 5/8, or $6.25 per
$1,000 face amount, to a price of 99 7/8. Its yield climbed 9
basis points to 6.51 percent. For the week, the yield surged 30
basis points, the most since the week ended Nov. 6, 1998.
The 30-year bond fell 1/2 to 100 26/32 and its yield rose 4
basis points to 6.19 percent. The bond had its worst week since
February 1999, dropping 2.9 percent including reinvested interest.
It shaved its year-to-date gains to 5.8 percent, down from 13
percent in early April. The yield on the most active two-year note
rose 8 basis points to 6.83 percent as its price fell 1/8 to 99
5/32.
Treasuries fell after the Labor Department said the jobless
rate fell to 3.9 percent in April, below the 4 percent expected by
economists in a Bloomberg News survey. The economy added 340,000
jobs in April, as forecast.
Investors also fretted over the 0.4 percent rise in average
hourly earnings in April, which compounded inflation concerns
raised by a report last week that employment costs in the first
quarter jumped 1.4 percent, the biggest increase in 10 years.
`Exceeding Speed Limit'
``The economy has exceeded the speed limit'' and that's not
good for bonds, said Bruce Alston, who manages $1.5 billion for
Value Line Asset Management. ``Concerns of the Fed, particularly
the shrinking labor pool and rising employment costs, are all
showing signs of life.''
The Fed, which has already increased its target fed funds
rate in five quarter-point moves since June to 6 percent, hasn't
raised it by a half-point since February 1995.
Federal funds futures, the futures market's closest gauge of
Fed rate expectations, suggest many investors expect a half-point
rate rise when policy-makers meet May 16, based on the 6.465
percent implied yield on the June contract. The yield rose 1.5
basis points today and about 19 basis points the past two weeks.
Investors are ``building a defensive position,'' and selling
Treasuries, said Thomas Sowanick, chief fixed-income strategist at
Merrill Lynch & Co. He sees the two-year yield rising to 7 percent
and the 10-year yield to 6.62 percent before the Fed meeting.
Finkelstein of Boston Advisors is among investors taking a
cautious approach. To keep his portfolio's interest-rate risk in
line with the index he follows, he used the proceeds from the zero-
coupon bonds he sold this week to buy Treasuries maturing in seven
to 10 years.
``There's another 25 basis points coming at minimum''
following a half-point increase this month, he forecast. All
Treasury yields may rise about 25 basis points by June, he said.
Jump in Inflation
The 30-year yield has risen about 50 basis points in the past
3 1/2 weeks as a series of reports began to show growing price
pressures. Consumer-price inflation rose at an annual pace of 3.7
percent through March, up from 1.8 percent in the year-ago period,
while the governments employment cost index rose at the fastest
pace in 10 years in the first quarter.
The bond's yield, after subtracting for consumer-price
inflation is at 2.48 percent. That leaves investors with a much
smaller cushion against faster inflation than they had at the end
of last year, when the adjusted yield was 3.77 percent.
The job report allows the Fed to raise rates ``50 basis
points in the middle of May without being questioned, without
being accused of being too aggressive,'' said Patrick Sporl, who
helps manage $6 billion in fixed income at AMR Investment Services
Inc. in Fort Worth, Texas. He's been buying corporate and mortgage
securities that pay a floating-rate and less-active mortgage-
backed bonds with coupons greater than 7 percent.
Michael Materasso, who handles $7.5 billion in fixed-income
at Fiduciary Trust Co. International, also favors corporate debt
for their higher yields over Treasuries with comparable
maturities. He plans to sell longer-term corporate debt in his
portfolios and buy shorter-term corporate notes.
Quarter-Point Option
Bonds had risen before the employment statistics were
released after a news report suggested some Fed officials support
a gradualist approach of quarter-point rate increases, even as
many economists and investors forecast a half-point increase.
Economists at a majority of the primary dealers, those firms
that deal directly with the Fed, said Friday they expected the Fed
would raise the overnight lending target by a half-point,
according to a Bloomberg News survey. In the previous survey
conducted in March, only one of the 29 firms said such a move was
possible. The rest had expected a quarter-point rise.
Six weeks ago, David Schroeder, a senior portfolio manager at
American Century Investments in Mountain View, California, sold
Treasury debt maturing in 10 years and more and has kept the
proceeds in cash because he expects the Fed will raise interest
rates a half-point this month.
He said the two-year yield may rise to 7 percent in coming
months, at which time he'll buy short-term Treasuries for the $4
billion he manages.
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Best Regards, J.T. |
