March 17 (Bloomberg) -- The benchmark 10-year Treasury note fell for the first day in three as some investors said the lowest yields in eight months already reflect prospects for slow inflation.
``It's very hard to embrace Treasuries with yields at these levels without thinking the economy is going to crash,'' said Peter Cordrey, who helps manage $155 billion of fixed income at Prudential Investment Management in Newark, New Jersey.
A record proportion of investors said global bond prices have risen so far that it's no longer profitable to buy the securities, a survey of investors yesterday by Merrill Lynch & Co. showed. Some 73 percent of those questioned, who manage a combined $927 billion, said global bonds are overvalued.
The 4 percent note maturing in February 2014 fell more than 1/8, or $2.50 per $1,000 face amount, to 102 7/16 at 1 p.m. in New York, according to Zions Bancorp. Its yield rose 2 basis points to 3.70 percent, after falling as low as 3.65 percent in overnight trading. A basis point is 0.01 percentage point, and bond yields move inversely to prices.
Treasuries extended declines after the yield on the 10-year note rose above 3.66 percent in late morning trading in New York, which Prudential's Cordrey described as a so-called resistance level. More than $6 billion of higher yielding corporate bonds slated to be sold in coming days, including $5.5 billion of debt from Wells Fargo & Co., also lured some investors away from Treasuries, he said.
`Armageddon Scenario'
The yield on the 10-year note has declined 31 basis points this month, the most since September. Treasuries maturing in 10 years or more have returned 6.8 percent this year including reinvested interest, the best performance among world bond markets, according to the European Federation of Financial Analysts Societies. The Standard & Poor's 500 Index of stocks is up 0.84 percent.
Paul McCulley, who helps manage about $100 billion at Pacific Investment Management Co. in Newport Beach, California, yesterday said that he sees no value in the Treasury market. Only a person ``looking for an Armageddon scenario'' would find Treasuries appealing, he said.
A Bloomberg Survey shows the median forecast of economists is for economic growth of at least 4 percent every quarter this year, something that hasn't happened since 1983.
The so-called relative strength index is suggesting a pullback in prices may be near. On a 100-point scale, the three-day relative strength index for the benchmark 10-year note registered above 70 for a second day. An index above 70 suggests buying may soon cease, while a number below 30 indicates buying may soon begin.
Technical Indicators
By calculating the degree to which daily gains outpace daily losses, the index indicates possible turning points in a security, commodity or currency.
As a result, some investors are turning their attention to corporate bonds. Wells Fargo, the fourth-largest U.S. bank by assets, will sell $4 billion of three-year floating-rate notes priced to yield 6 basis points more than the three-month London interbank offered rate, or Libor, people familiar with the sale said.
The bank will also sell $1.5 billion of five-year fixed-rate notes priced to yield 50 basis points to 52 basis points above Treasury notes of comparable maturity, the people said.
Treasuries rose earlier after a government report showed consumer prices excluding food and energy rose 1.2 percent in the 12 months ended February. The rise compares with a 1.1 percent increase in the year ended January, the smallest gain since 1966. Prices overall rose 0.3 percent in February, compared with a 0.5 percent increase in January.
Tame Inflation
Subtracting the annual rise in the so-called core consumer price index, the benchmark 10-year Treasury note yields 2.46 percent. In the 10 years ended December 2003, the so-called real yield has averaged 3.25 percent.
The inflation report came a day after the Federal Reserve left its target interest rate at a four-decade low of 1 percent, citing lagging job growth and muted inflation. Slow inflation preserves the value of a bond's fixed payment, giving some investors confidence to buy Treasuries even as the economy accelerates.
``Treasuries represent good value,'' said Michael Cheah, who manages $2 billion of bonds at AIG SunAmerica Funds in Jersey City, New Jersey. Cheah, who bought five-year notes yesterday, correctly predicted in January that yields would fall. He said the yield may drop to 3.4 percent in the next four weeks.
`Very Positive'
In a sign that investors expect the inflation rate to remain low, the difference in yield between the two- and 10-year Treasury note is 2.21 percentage points, down from the high this year of 2.48 percentage points in January. The difference is near the narrowest since July 25. The five-year average is 1.20 percentage points, suggesting room for further narrowing.
``A small decline in inflation is a very large positive for Treasuries,'' said Ralph Axel, a government bond strategist in New York at HSBC Securities USA Inc., one of the 23 primary U.S. government securities dealers that trade with the Fed's New York branch.
Declines in Treasury prices may be tempered as low interest rates entice homeowners to prepay their mortgage loans. Rising prepayments mean holders of mortgage-backed securities have cash returned to them faster than they expected, leaving them to reinvest at lower rates.
Mortgage investors can buy fixed-rate investments such as Treasuries for protection against rising prepayment rates. The mortgage bond market is $5 trillion in size, compared with $3.2 trillion for the Treasury market.
Mortgage Index
A refinancing increase is ``generally a positive for Treasuries,'' Axel said. Holders of mortgages ``have to go buy duration somewhere. Where doesn't really matter -- it'll flow through to the Treasury market.''
An index of U.S. mortgage refinancing rose to its highest level since July as the average rate on a 30-year fixed-rate mortgage edged up to 5.37 percent from 5.34 percent last week, within half a percentage point of the 4.99 percent all-time low reached in June. The Mortgage Bankers Association's index surged 39.7 percent to 4983.7 from 3567.6.
More than two years after the current expansion began, the economy has yet to create as many jobs as existed before the recession, making this the worst employment recovery since World War II. The economy added 21,000 jobs last month, less than a sixth of the median forecast of an increase of 130,000 in a Bloomberg survey of economists.
Confidence
``So few jobs are being added to the economy right now it's a buyer's market,'' said Scot Johnson, who manages $3 billion of government bonds at AIM Capital Management Inc. in Houston. ``Employers are not having to pay to get people in the door -- that keeps a lid on wage inflation, and the Fed from raising interest rates.''
An ABC News/Money magazine index of consumer confidence fell to the lowest since May 2003, dropping 4 points to -22 in the week ended March 15. A reading below zero means the number of negative responses is greater than the number of positive responses.
The rising cost of energy can start to drag on consumer confidence as it starts to eat into income and discretionary spending. U.S. motorists can expect to pay record prices for gasoline this spring and summer, the Energy Department said last week. Gasoline will average $1.74 a gallon from April through September, up 13 cents from a forecast last month. |
