U.S. Bond Rally Seen by Investors if Federal Reserve Doesn't Boost Rates
By Wes Goodman
U.S. Bond Rally Seen if Fed Doesn't Lift Rates: Rates of Return
(Repeats story from June 4, adds comment in 3rd-last
paragraph.)
New York, June 5 (Bloomberg) -- Some investors don't buy
the widely held view that the Federal Reserve is about to raise
interest rates. Instead, they're buying Treasury securities in a
bet the Fed won't have to act.
''I don't think the Fed will tighten,'' said Ken Anderson,
who oversees $7 billion of bonds at Evergreen Asset Management
Corp. in Purchase, New York. ''You're going to see the market
rally. This is a tremendous buying opportunity.''
Anderson, who has been loading up on long-term Treasuries,
sees the 30-year yield falling more than 30 basis points from
5.96 percent now. That would happen in just a few days following
the government's May consumer price report in two weeks, which
he predicts will show inflation slowing after a rise in April.
Thirty-year yields have risen more than 85 basis points
since the start of the year on concern about the prospects of
creeping inflation and a Fed rate rise. The 30-year bond has
handed investors losses of 9.7 percent year-to-date.
If Anderson is right, bonds could cut those losses by more
than a third. And two-year notes, among the most sensitive
indicators of Fed rate expectations, stand to boost current
returns of less than 1 percent into bigger gains.
''If the Fed doesn't tighten, absolutely you're going to
have a rally,'' said Andrew Brenner, a director at Fimat USA
Inc. He predicts bond yields will fall 25 basis points if the
Fed holds off, and even bigger declines in note rates.
Many investors have concluded the Fed will raise rates to
keep eight years of sustained economic growth from pushing
inflation higher. The increase could come as soon as the Fed's
June 29-30 meeting, some analysts say. The Fed warned May 18
it's prepared to boost rates to curb inflation, deepening the
market's losses. Inflation eats into the value of a bond's fixed
payments.
That warning extended the market's losses. Treasuries due
in more than one year have handed investors losses of 5.08
percent year-to-date, according to an index compiled by Ryan
Labs Inc., a money management research firm. That's the worst
performance since the firm began tracking such statistics in
1979.
Slowdown?
The Fed has reasons to keep its current policy intact.
There are already signs the economy is cooling on its own.
Retail sales slowed in April from March, as did orders for big-
ticket items like washing machines and refrigerators. Analysts
also expect the rise in interest rates to slow home sales.
Benchmark mortgage rates climbed to the highest level in more
than 1 1/2 years this week, according to Freddie Mac, the
nation's No. 2 provider of home financing.
Investors saw another sign of a slowdown in today's
government report on May employment. The U.S. added 11,000 jobs
during the month, far less than the average forecast of 216,000
among economists surveyed by Bloomberg News. To be sure, the
release also showed wages rose a notch and unemployment fell,
matching the 29-year low set in March.
Inflation 'Not Prevalent'
''Interest rates that are now almost 1 percentage point
higher than they were at the beginning of the year are enough to
slow down this economy,'' said Zane Brown,'' who oversees $12
billion of bonds at Lord, Abbett & Co. He sees long-bond yields
falling to 5 1/4 percent by the end of the year, while he favors
the higher rates offered by high-yield and emerging-market
bonds.
The Fed also might hold off because inflation has yet to
become a problem.
''Oil is coming down from its high, and gold looks pretty
low,'' said Ted Neild, who helps oversees $40 billion of debt at
Nuveen Advisory Corp. in Chicago. ''Inflation is not prevalent.
We think bonds are attractive.''
Traders had fretted that gains in the price of crude oil --
used to make everything from gasoline to asphalt -- would boost
inflation. Crude is up 43 percent so far this year, after rising
almost 60 percent in May.
Crude fell to its lowest level in almost two months on
Tuesday, to $16.34 per barrel, though it's up to $17.28 per
barrel today. Gold for August delivery is at $267.20 an ounce, a
20-year low.
Still, government figures out next week are expected to
show that retail sales probably increased by 0.5 percent in May
after rising 0.1 percent in April, led by demand for durable
goods ranging from autos and computers to building materials and
furniture, analysts said.
''You're going to see retail sales come roaring back in
May,'' said William Sullivan, an economist at Morgan Stanley
Dean Witter in New York. That will keep alive Fed concerns about
consumer demand driving prices higher, Sullivan said. The
Commerce Department issues the report Friday.
Neild, who doesn't rule out a Fed rate increase, said he
sees bond rates falling to 5.50 percent by year end.
Steve Casella, who oversees $600 million at Genoa
Management Co. in Dallas, is favoring short-term Treasuries,
those most sensitive to Fed policy changes. He's buying two- and
five-year notes. To his thinking, rates could fall as much as 10
basis points if the Fed doesn't move to raise rates this month. |
