I wonder if Bulls (AJC) ever take a sentiment seriously...
Bonds Fall as Dollar Slumps and Traders Balk at Yields Near Record Lows
U.S. Bonds Fall as Dollar Drops; Yields Lack Appeal (Update1) (Updates and adds prices.)
New York, Aug. 24 (Bloomberg) -- U.S. bonds fell for the first time in four days as the dollar declined against the yen and equity markets stabilized, causing investors to balk at yields near record lows. ''The market has come so far, so fast'' that some people are reluctant to buy, said Susan Huang, who oversees $30 billion in bonds at Chase Asset Management.
Treasuries on Friday posted the biggest gain in more than two months as tumbling bond and currency markets in Russia and Latin America, and falling stocks around the world, drove investors to the relative safety of U.S. government debt. Thirty- year bond yields touched 5.38 percent -- the lowest since the government began regular sales of the securities in 1977.
Benchmark 30-year bonds gave back some of those gains today, falling 15/32, or $4.69 per $1,000, to 100 18/32 and pushing the yield up 3 basis points to 5.46 percent. Two- and 10-year notes were little changed.
Yields on U.S. government securities maturing all the way out to 2028 are below the Federal Reserve's 5.50 percent target for overnight lending between banks. Some traders say that's a signal the Fed may lower interest rates before long to offset a slowing economy.
Bonds began today's slide in overseas trading as the dollar fell against the yen after a Japanese official said the country's government ''is ready to take action in currency markets whenever necessary,'' fueling speculation that Japan will try to boost the yen by selling dollars for the currency.
A weakening dollar cuts returns on U.S. assets for those who convert the proceeds to other currencies. The dollar recently traded at 143.74 yen, down from 144.64 yen late Friday. ''The world's problems haven't gone away,'' said Robert Giordano, who manages about $1 billion in bonds for Bank Leumi Trust Co. Still, bond investors ''are taking a few days to see how things pan out.''
Stocks Stabilize
Stability in U.S. stocks also dimmed Treasury securities' appeal. The Dow Jones Industrial Average rose 32.98 to 8566.61. ''The bond market is something of a counterbalance for the stock market'' right now, said Jack Ablin, who oversees about $270 million in assets at Colonial Asset Management in Jacksonville, Florida, and expects 30-year bond yields to rise to 5.50 percent in coming days. He's recommending that his clients steer clear of stocks for the time being, and focus on high quality fixed-income investments.
Bond yields fell 20 basis points in two weeks as investors poured into Treasuries to escape tumbling currency, bond and stock markets. The Russian government last week let the ruble devalue, spurring a decline that carried into emerging markets such as Mexico, Venezuela, Brazil and Argentina.
Russian stocks and bonds rose today after President Boris Yeltsin dismissed his four-month-old cabinet and nominated former Prime Minister Viktor Chernomyrdin to the post for a second time. The yield on Russia' Eurobond due in 2001 fell 1.13 percentage points to 50.62 percent, while the RTS stock index climbed 5.7 percent to 86.40.
Michael Cloherty, a bond strategist at Credit Suisse First Boston, said he doesn't expected another Treasury rally until international troubles flare again. U.S. bonds ''need a steady stream of bad news to stay at these levels,'' he said.
Time to Buy?
Still, some bullish investors said now might be a good time to buy bonds because yields are likely to fall as low as 5 percent by year-end. The U.S. economy will keep slowing as exports to troubled regions fall, and inflation has little chance of accelerating with cheaper imports flooding in, they said. ''The trend in rates continues to be lower,'' said Garth Nisbet, who manages $750 million in bonds at Crabbe Huson Group in Portland, Oregon. ''The bears don't have much to hang on to.''
Nisbet said the Federal Reserve's next move probably will be to lower the target for overnight borrowing between banks. At their fifth meeting of the year last week, the central bankers opted to leave the rate unchanged.
Judging from rates of three-month Eurodollar futures contracts, among the most sensitive securities to changing rate expectations, more traders are betting Fed rates will fall by the time the March contract expires. The contract recently traded at 5.46 percent, below the current three-month borrowing rate of 5.69 percent. That's a sign some traders expect a 25-basis-point cut in Fed borrowing rates by mid-March.
Investors this week will turn their attention to economic reports, including consumer confidence and existing home sales tomorrow, durable goods orders on Wednesday and personal income figures on Friday.
Swap Markets
At today's yield of 5.28 percent, U.S. 10-year notes yield 386 basis points more than the 1.42 percent yield on the No. 203 benchmark 10-year Japanese bond. U.S. debt now yields 102 basis points more than the 4.26 percent yield on 10-year German bonds.
The benchmark five-year U.S. dollar swap spread widened 7 basis points to 72, the highest since it reached 81 basis points on Jan. 11, 1991. The spread is the difference between the yield on the benchmark Treasury and the highest rate at which a ''AAA''- rated corporation can sell its fixed-rate bonds, if it wants to do a swap that leaves it paying no more than the London interbank offered rate.
Corporations often use interest-rate and currency swaps to guard against changes in interest rates. The banks and securities firms that provide these swaps often buy or sell U.S. Treasury securities to hedge against a rise in interest rates.
About $56 billion in Treasuries traded through most of the major bond brokers as of 3 p.m. Eastern time, according to GovPX, Inc., a bond pricing service. Volume was about 31 percent above average for a Monday in the past month, GovPX said.
The so-called basis, which reflects the difference between the current 30-year bond and the September futures contract, was little changed at 346/32.
The three-month bill's discount rate rose 7 basis points to 4.93 percent, a bond-equivalent yield of 5.06 percent. The six- month bill's discount rate rose 3 basis points to 4.95 percent, a bond-equivalent yield of 5.15 percent, while the one-year bill yield fell 2 basis points to 4.90 percent, a bond equivalent of 5.16 percent.
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