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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (21052)	1/11/2005 2:27:44 PM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

U.S. Jan. 11 (Bloomberg) -- U.S. Treasury notes fell on speculation a drop in the dollar will curb demand from international investors at the government's debt auctions. This week the Treasury Department will sell $15 billion of five-year notes and $10 billion of 10-year Treasury Inflation Protected Securities. The dollar weakened for a second day after Treasury Secretary John Snow said exchange rates are best left to market forces. ``The weaker dollar will hurt Treasuries, and overall the market is bearish because there will be higher interest rates and growth is picking up,'' said Wee-Khoon Chong, a fixed-income strategist at Royal Bank of Scotland Plc in London. ``The market does tend to sell off before new supply.'' The most recently issued five-year note, a 3 1/2 percent note due in December 2009, fell 1/16, or 63 cents per $1,000 face amount, to 98 29/32 at 8:23 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield rose 1 basis point, or 0.01 percentage point, to 3.74 percent and is up from 3.19 percent in October. The benchmark 4 1/4 percent note due in November 2014 declined about 1/8 to 99 23/32. The yield was 4.28 percent. Snow, in an interview with Reuters yesterday, said the Bush administration believes the dollar's value should be set by markets. ``We believe in market forces and free capital flows,'' Snow said. He said on Jan. 7 that U.S. policy makers want to ``sustain the strength'' of the dollar, remarks that helped spur the currency's second-biggest weekly gain ever against the euro. Against the euro, the dollar weakened to $1.3147 from $1.3073 late yesterday in New York, its biggest one-day fall in two weeks, according to currency-trading system EBS. It declined to 103.99 yen from 104.34. Reluctant Investors A declining U.S. currency curbs the appeal of holding dollar- denominated assets. The dollar dropped 7.1 percent against the euro and 4.3 percent versus the yen last year. The five-year note sale will take place tomorrow, with the auction of 10-year TIPS occurring a day later. A $15 billion U.S. five-year note auction on Dec. 8 drew fewer bids than the prior sale on Nov. 9. The ratio of bids to securities sold fell to 2.6 from 2.9. ``There is significant risk foreign demand for Treasuries will not be able to increase at a rate that's fast enough to take down the additional Treasury supply at current yields,'' said Joseph Shatz, a government bond strategist at Merrill Lynch & Co. in New York. Merrill Lynch is one of 22 primary dealers, government securities firms that trade directly with the Federal Reserve's New York branch and are obligated to bid at the auctions. Japan, the biggest overseas owner of U.S. government debt, cut its holdings for a second month in October, the first back-to- back decrease since September 2001, according to the most recent data from the Treasury. China, the second-largest overseas owner, raised holdings at a slower pace. Yield Gap U.S. 10-year Treasuries yielded about 68 basis points more than comparable German debt today, matching the gap on Dec. 27, which was the widest since August 2000. As recently as September, the yields were the same. A wider gap signals greater demand for European bonds relative to U.S. debt. The gap grew as traders bet that Fed policy makers will raise the benchmark interest rate faster than their European Central Bank counterparts. ``We expect the 10-year spread could widen to 80 to 90 basis points,'' said Michael Rottman, head of fixed-income research in Munich at HVB Group, Germany's second-biggest bank by assets. ``The strong euro will limit potential hikes from the European Central Bank.'' Rate Outlook The ECB has kept its main rate unchanged at 2 percent since June 2003 to spur growth in the euro-region. The Fed lifted its interest-rate target for overnight loans between banks five times to 2.25 percent from 1 percent last year. The federal funds target probably will reach 3.5 percent by the end of this year, according to the median estimate of 67 economists in a Bloomberg News survey. Reports this week probably will show inflation slowed in December, according to economists surveyed by Bloomberg. Inflation lowers the value of a bond's fixed payments. The government is expected to say prices of goods imported to the U.S. fell 0.4 percent last month, according to the median estimate of 37 economists surveyed by Bloomberg. The Labor Department will release the figure tomorrow. Another Labor Department report on Jan. 14 may show an index of producer prices fell 0.1 percent in December, after a 0.5 percent gain in November, said a separate survey of 68 economists. ``Inflation is not a problem and needn't be a problem as long as the Fed keeps edging interest rates higher,'' said Thomas. Neutral Rate The fed funds target is still below the ``neutral'' level that would allow the economy to grow at a sustainable pace with little inflation, Atlanta Fed President Jack Guynn said yesterday. A neutral rate is one that neither stimulates nor restrains the economy. Fed officials including Vice Chairman Roger Ferguson have said this level changes as economic conditions evolve. St. Louis Fed President William Poole has said a neutral fed funds rate is between 3 percent and 5 percent. bloomberg.com