We have to get thru that CPI report on Thursday..
Treasury Bonds Gain for 1st Time in 3 Days; Higher Yields Lure Investors
By Beth Williams
U.S. Bonds Rise as Higher Yields Attract Investors (Update2)
(Updates prices.)
New York, May 10 (Bloomberg) -- U.S. bonds rose, snapping a
two-day slide, as the highest 30-year Treasury yields in almost a
year lured investors.
''It's a buying opportunity,'' said Alan Day, who helps
oversee about $4 billion at Stratevest Group in Burlington,
Vermont. ''There's an overreaction to the threat of inflation.''
The 30-year bond rose 1/4 point, or $2.50 per $1,000
security, to 92 11/32. Its yield fell 2 basis points to 5.79
percent, after earlier climbing to 5.84 percent -- the highest
since May 27. Yields on two-year notes, the most actively traded
Treasuries, fell 2 basis points to 5.14 percent.
Treasuries last week turned in their worst performance since
February amid concern the economy's strength and a 50 percent
gain in oil prices this year will spur inflation, which eats into
the value of a bond's fixed payments. Investors who bought 30-
year Treasuries at the start of the year are sitting on losses of
7.7 percent, when price declines and interest are taken into
account.
Yet some investors said worries about inflation are
overblown, making bonds ripe for a rebound. With consumer prices
up 1.7 percent in the 12 months ended in March, 30-year
Treasuries yield 4.09 percent after inflation -- near the highest
in about a year and a level some investors find attractive.
Tame So Far
Government reports this week on producer and consumer prices
will probably show that, aside from energy costs, inflation is
tame, analysts said. Other recent reports showed rises in labor
costs were muted in recent months, lessening the chance the
Federal Reserve will raise interest rates anytime soon.
Bonds also got a lift after the Federal Reserve bought some
$1.1 billion in Treasury notes, bonds and inflation-indexed
securities in two separate outright purchases, also known as
coupon passes. The Fed makes these purchases periodically to
permanently add money to the economy. The moves do not signal a
change in monetary policy.
Some investors are reluctant to add to their holdings until
the government completes its sales of $27 billion of new five-
and 10-year notes this week.
''The bond market is taking it on the chin,'' said Thomas
Donne, who oversees $1.9 billion of fixed-income securities at
Banc One Investment Advisors Group in Columbus, Ohio. With this
week's sales ahead, ''it wouldn't surprise me to see rates go
even higher,'' he said.
The Treasury will sell $15 billion of five-year notes
tomorrow and $12 billion of 10-year notes Wednesday. In trading
today, the existing five- and 10-year benchmarks lagged other
Treasuries, leaving their yields little changed at 5.36 percent
and 5.53 percent, respectively.
''The auctions will be a barometer'' of investor demand and
sentiment, said Tony Crescenzi, head of government bond trading
at Miller Tabak Hirsch & Co.
Other borrowers are also lining up with expected sales of
more than $6 billion this week.
R.J. Reynolds Tobacco Holdings Inc., the No. 2 U.S.
cigarette maker, kicked off corporate bond sales today, raising
$1.25 billion by selling four-, seven- and 10-year securities.
The maker of Winston and other cigarettes was able to boost its
sale by 25 percent because of demand for the new securities,
which marked the company's debut sale as a tobacco-only company.
Goldman Sachs Group Inc., Lyondell Chemicals Co. and Fannie
Mae are also expected to borrow at least $1 billion in the days
ahead.
Investors will also watch reports on retail sales,
industrial output, and productivity this week for clues about the
economy's strength and prospects for faster inflation.
''There's nothing that argues for stepping up to the
plate,'' and being a big buyer of Treasuries, said William
Sullivan, an economist at Morgan Stanley Dean Witter & Co.
Treasury Prices, Volume
U.S. 10-year notes yield 418 basis points more than the 1.35
percent yield on the most current 10-year Japanese bond, 27 basis
points more than at the end of April. U.S. debt now yields 149
basis points more than the 4.04 percent yield on 10-year German
bonds, 2 basis points higher than at month-end.
About $38.5 billion of bills, notes and bonds traded through
most of the major bond brokers by 3 p.m. New York time, 21.8
percent less than the average Monday in the second quarter of
1998 and 12.8 percent less than the average Monday in the past
month, according to GovPX Inc., a bond pricing service.
The basis, which reflects the difference between the current
30-year bond and the June futures contract adjusted for a
conversion factor, was 1/8 higher at 333/32, or 10 13/32 points.
Yields on three-month bills fell 2 basis points to 4.57
percent on a bond-equivalent basis. Yields on six-month bills
fell 1 basis point to 4.68 percent, while one-year yields fell 2
basis points to 4.75 percent.
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