U.S. Treasury Note Investors More Bullish After Rise in Yields
March 28 (Bloomberg) -- Investors in U.S. Treasury securities are their most bullish in seven weeks, reflecting optimism that the highest 10-year note yields since June offer adequate compensation for inflation.
Ried, Thunberg & Co.'s weekly index measuring the outlook for U.S. government debt rose to 42 from 40. The last time the index was this high was Feb. 4. The 32 investors polled by the bond research firm, based in Jersey City, New Jersey, manage a combined $1.25 trillion.
The rise in the index may indicate that the biggest monthly drop in Treasuries since November, which pushed 10-year yields to 4.69 percent, will pause. A government report on March 31 will show a measure of inflation calculated by the Federal Reserve held steady in February, according to the median estimate of 11 economists surveyed by Bloomberg News. A day later the Labor Department releases its monthly employment report.
``We're getting in the range of some value for Treasuries,'' said Kenneth Taubes, who oversees $16 billion as director of fixed income at Pioneer Investments in Boston and has been adding Treasuries to funds he manages. ``I don't think inflation is going to get much worse.''
The benchmark 4 percent note maturing in February 2015 dropped last week by about 5/8, or $6.25 per $1,000 face amount, to 95 5/16, according to bond broker Cantor Fitzgerald LP. The yield rose 8 basis points to 4.59 percent and peaked at 4.69 percent. A basis point is 0.01 percentage point.
The yield is higher than the 4.5 percent expected by mid- year, according to the median estimate of 63 economists polled by Bloomberg from March 1 to March 8.
Unexpected Decline
Ried Thunberg's index rose the prior week from 38, indicating that investors failed to anticipate the drop in Treasuries. Readings under 50 mean investors expect 10-year note prices to be lower at the end of June.
Ten-year note yields have risen from 4 percent in February as a rise in oil and gasoline prices to records and a surge in commodities fanned concern about faster inflation, which erodes the purchasing power of a bond's fixed payments.
Treasury securities have lost 0.89 percent this month, including reinvested interest, according to Merrill Lynch & Co.'s U.S. Treasury Master Index. The performance is the worst since November, when it fell 1.33 percent. The firm's index of all sovereign debt is down 0.1 percent this month. For the quarter, the Treasury index has lost 0.95 percent.
``Inflation is getting priced in'' to bond yields, which had been too low, said Patrick Kelly, managing director in LaSalle National Bank's broker-dealer services division in Boca Raton, Florida. Last year, his firm distributed $65 billion of fixed- income investments for individual investors.
Real Yields
A Labor Department report on March 23 showed consumer prices excluding food and energy rose 2.4 percent in February from a year earlier. Though the increase was the biggest since August 2002, it was below the average for the past 20 years of 3.2 percent.
Ten-year Treasuries yield about 2.2 percent more than the index, the most since August.
``The cumulative effects of monetary policy are going to put a lid on inflation,'' said Pioneer's Taubes.
The Fed on March 22 raised its target interest rate for the seventh time since June, to 2.75 percent from 2.50 percent, and said ``pressures on inflation have picked up in recent months.'' The 10-year note fell 7/8 point that day and its yield rose 12 basis points, to 4.64 percent, amid speculation the Fed will raise rates at its six remaining meetings this year.
Not `Appropriate'
Yields are still ``lower than what's appropriate given expectations of monetary policy and inflation going forward,'' said Colin Lundgren, a Ried Thunberg survey participant who oversees investment strategy for $100 billion of bonds at American Express Financial Corp. in Minneapolis.
Funds that Lundgren manages hold a smaller percentage of Treasuries than their benchmarks. The investors polled by Ried Thunberg cut their holdings of Treasury and government agency debt to 29 percent of portfolios from 30 percent on average.
The Commerce Department on March 31 may say its price index for personal consumption expenditures excluding food and energy rose 1.6 percent in February from a year ago, the same as in January, according to the Bloomberg survey.
Last month, the Fed forecast the core PCE price index will rise 1.5 percent to 2 percent this year. Personal consumption expenditures are the portion of U.S. gross domestic product coming from spending by consumers.
On April 1, the Labor Department will release its report on March employment. The economy added 220,000 jobs, according to the median estimate of 56 economists surveyed by Bloomberg.
Debt Auction
When the last report was release on March 4, the 10-year note gained more than half a point even though there was a greater-than-expected increase of 262,000 jobs for February. Average hourly earnings were unchanged, damping concern about faster inflation. The earnings probably rose 0.2 percent this month, according to the Bloomberg poll.
The rise in Ried Thunberg's index preceded the government's scheduled sale of two-year notes at a monthly auction March 30.
The size of the sale will be announced at 11 a.m. in Washington today. Wrightson ICAP, a research firm specializing in Treasury finance, forecasts $24 billion, unchanged from the past eight sales. Wrightson and Ried Thunberg are units of the U.K.'s ICAP PLC, the world's largest interdealer broker.
Two-year note yields, more sensitive than longer-maturity debt to expectations for the Fed's benchmark rate, set a more than three-year high of 3.90 percent on March 23 as investors foresaw further Fed rate increases this year. The government hasn't sold a two-year note at a higher yield since 2001.
``The Fed's still tightening and yields are still rising,'' said Glen Capelo, a two-year note trader at RBS Greenwich Capital in Greenwich, Connecticut. The firm is one of 22 primary dealers of U.S. government securities, which are obligated to bid at the auctions.
Lehman Brothers Inc. expects the addition of Treasury securities issued in March to lengthen its Treasury index's duration by 0.04 year to 5.21 years. Duration is a measure of price sensitivity to changes in yield. An increase can prompt purchases of bonds by investors whose holdings track an index. |
