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U.S. Treasury Bond Investors Become Most Bullish Since 2003
Feb. 27 (Bloomberg) -- Bond investors are the most optimistic about Treasuries since 2003, a sign that the worst start to a year for U.S. government debt this decade may be about to end.
Ried, Thunberg & Co.'s weekly index on the outlook for 10- year Treasuries rose 1 to 50, the highest since Sept. 19, 2003. Readings above 50 indicate that investors who oversee about $1.35 trillion expect the securities to rise by the end of March, according to the Jersey City, New Jersey-based unit of ICAP Plc, the largest broker of bonds between dealers.
Investors are turning bullish because central bank officials, including Federal Reserve Chairman Ben S. Bernanke, are signaling they will raise interest rates to keep inflation under control. That's giving bond buyers confidence as 10-year yields hover around 4.60 percent, a level that preceded the last three rallies in the government bond market.
With inflation at bay, ``a lot of our salespeople have been saying that if the 10-year yield rises to 4.6 percent, their customers will be interested,'' Glen Capelo, a trader of Treasuries at RBS Greenwich Capital in Greenwich, Connecticut, said in a Feb. 24 interview. RBS is one of the 22 primary dealers that trade with the Federal Reserve Bank of New York.
Investors are also growing more confident because they expect the Fed to raise rates two more times to 5 percent by June from the current 4.5 percent, according to trading in Treasury futures.
``Long-bond buyers aren't afraid of inflation or increased interest rates, the way short-term bond buyers are,'' Benjamin Pace, chief investment officer at Deutsche Bank Private Wealth Management in New York, said on Feb. 22. ``The Fed still seems to be in the game for the foreseeable future in driving rates up.''
Worst Start
The $4.1 trillion Treasuries market lost 0.29 percent, including reinvested interest, since December, the worst start to a year since they declined 1.75 percent in 1999, Merrill Lynch & Co. data show.
The benchmark 10-year note closed last week yielding 4.58 percent, up from 4.54 percent the previous week, according to New York-based bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent note due in February 2016 fell about 5/16, or $3.13 per $1,000 face amount, to 99 3/8.
Deutsche Bank Securities Inc., another primary dealer, recommends 10-year Treasuries after they lost 1.02 percent this year. The notes yield 2.48 percentage points more than the rate of inflation excluding food and energy, the widest margin since July 2004.
That's ``decent value,'' according to Ellen Stanek, who helps manage $10.6 billion at Robert W. Baird & Co. in Milwaukee. ``Inflation will remain lower longer than people expect.''
Turning Point
Traders also point to the history of rallies after 10-year yields rose above 4.60 percent.
The day before the central bank's first increase on June 30, 2004, the 10-year note yielded 4.69 percent. By September, it was at 3.98 percent.
The note's yield plunged 75 basis points to 3.89 percent on June 1, 2005, from 4.64 percent in March. And, on Nov. 4 it closed at 4.66 percent before ending the year at 4.39 percent.
The last time the Ried, Thunberg index was this high, the 10- year note's yield fell about 25 basis points to 4.18 percent in the following two weeks. A basis point is 0.01 percentage point.
Fed Expectations
Gains may be limited because 10-year Treasuries yield about 15 basis points less than two-year notes, a phenomenon known as an inverted yield curve. They also yield only 8 basis points more than the central bank's 4.5 percent benchmark rate. Over the past decade, 10-year notes gave yielded an average of 1.32 percentage points more than the Fed's interest-rate target.
Investors may sell the notes as it becomes clear the Fed will raise its benchmark rate two more times, said Amitabh Arora, chief U.S. interest rate strategist in New York at Lehman Brothers Inc.
``The only thing that would cause the market to rally is if we got a significant number of Fed members saying that they should pause,'' Arora said on Feb. 21. ``This isn't likely.''
Arora said the 10-year note's yield may reach 4.9 percent by midyear. Lehman, a primary dealer, led Institutional Investor magazine's rankings of top bond strategists for six years.
The 10-year note rose Feb. 22 when the Labor Department said consumer prices excluding food and energy increased 0.2 percent last month. The so-called core inflation rate hasn't risen more than 0.2 percent since March 2005. Core prices climbed 2.1 percent from a year earlier, down from 2.2 percent in December.
Bernanke reinforced his inflation-fighting rhetoric when he said on Feb. 24 that ``low and stable inflation expectations'' are needed to achieve high employment and moderate interest rates. He made the comments in prepared remarks at Princeton University in New Jersey. |
