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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: tradermike_1999 who wrote (10758)	10/14/2001 3:35:17 PM
From: puborectalis	Read Replies (2) \| Respond to of 74559

Merrill Tells Govt to Keep Buying Back Debt: U.S. Bonds Outlook By Heather Bandur New York, Oct. 14 (Bloomberg) -- The budget surplus that Treasury officials have used to buy back bonds for the last 20 months is disappearing. That's a problem because without the buybacks, the yield on 10- and 30-year bonds -- benchmarks for corporate and consumer rates -- could rise, deepening an economic slowdown. Merrill Lynch & Co.'s advice to the Treasury: Keep buying back bonds even if the surplus turns into a deficit. How? Sell more shorter-dated notes, such as two- and five-year maturities, and use the proceeds to buy back 10- and 30-year bonds. ``If the government can persuade people that the buybacks are permanent, while federal deficits are temporary, then'' interest rates could decline, said Gerald Lucas, a government bond strategist at Merrill Lynch & Co. Barclays Capital and Scotia Capital also say the Treasury may sell notes to finance purchases of higher-yielding bonds. If the Treasury does, the gap between two-year note and 30-year bond yields could narrow from today's 2.63 percentage points. Investors may benefit from selling notes and buying bonds. Treasury spokesman Tony Fratto said the government plans to buy back bonds this month after canceling a planned buyback for September. He declined to comment on the government's plans for the buyback program after this month. The Treasury has retired $55 billion of bonds since beginning the program in early 2000. Yield Gap While 10- and 30-year bond yields haven't risen yet this year, they have declined less than two-year note yields in part on concern the erosion of the surplus will lead to an increase in the supply of debt. Bonds lagged two-year notes further after the Sept. 11 terrorist attacks prompted the government to cobble together a $100 billion tax cut and spending plan to help foster an economic recovery. Two-year note yields have tumbled 2.31 percentage points this year to 2.79 percent, a fraction above a 43-year low, as the Federal Reserve has cut its benchmark lending rate nine times. Ten- year note yields, by comparison, have only fallen 45 basis points to 4.66 percent. The 30-year bond yield has fallen even less, dropping 4 basis points to 5.42 percent. The budget surplus began shrinking this year when the economy slowed, throttling tax receipts, and the government lowered taxes. The government had its largest monthly budget deficit on record in August, shrinking its surplus for the fiscal year ended in September by $80 billion. Merrill forecasts a $35 billion budget deficit in 2002. Even so, Lucas recommends the Treasury buy back $24 billion of bonds next year with money from the sale of notes. He says that could keep down bond yields that otherwise would soar as the deficit emerges and investors worry the Fed rate cuts may fuel faster inflation. Surplus in 2003? Gemma Wright, a research director at Barclays Capital, says she expects the government to concentrate most of its debt sales next year in Treasury bills and two- and five-year notes to keep 10- and 30-year bond yields down. She forecasts that 74 percent of the approximately $380 billion in debt the government will sell next year, excluding Treasury bills, will be two- and five-year notes. Wright said the sales could help maintain the buyback program until the government returns to surpluses in 2003. She forecasts the government will post a surplus of at least $110 billion in 2003 and $150 billion in 2004 as the economy rebounds. Andrew Pyle, a senior economist at Scotia Capital, said a return soon to surpluses is key to keeping 10- and 30-year yields down. Otherwise, investors will bid up bond yields on expectations the deficit will lead officials to eventually scrap the buyback program. ``You can temporarily boost issuance of shorter-term notes and benefit by taking pressure off the long end of the Treasury curve,'' said Andrew Pyle, senior economist at Scotia Capital in Toronto. ``But this only works under the assumption that it would not be a long-term thing -- it's a short-term corrective measure.'' Not all say the Treasury should work to hold down bond yields. Drew Matus, a financial markets economist at Lehman Brothers Holding Inc., says lower bond yields would indicate investors aren't expecting an economic recovery soon. ``The only way'' to bring down long rates ``is to have people think that the economy isn't going to come back anytime soon, which is something the government doesn't want to do,'' Matus said.

To: tradermike_1999 who wrote (10758)	10/14/2001 10:56:37 PM
From: mr.mark	Respond to of 74559

"I'll talk more about what I think will happen after this rally ends tomorrow." is the rally ending tomorrow, or do you mean... i'll talk more tomorrow about what i think will happen after this rally ends