June 13 (Bloomberg) -- U.S. 10-year Treasuries surged the most since February as speculators bet that yields at a five- year high will curb the economy and inflation.
Government debt due in 2017 rose as investors wagered that Treasuries would halt a five-week slide, the longest since 2005. Ten-year yields fell back below the Federal Reserve's 5.25 percent target, after exceeding that rate yesterday for the first time in a year.
``The selling is temporarily exhausted,'' said Donald Ellenberger, who oversees $6 billion as co-head of government and mortgage bonds at Federated Investors Inc. in Pittsburgh. Treasuries may be ``appropriately priced to a Fed-on-hold scenario, as opposed to inappropriately priced for an easing scenario that we were not going to see.''
The yield on the benchmark 10-year note fell 7 basis points, or 0.07 percentage point, to 5.23 percent at 1:30 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent note due May 2017 rose 1/2, or $5 per $1,000 face amount, to 94 13/32. Yields, which move inversely to prices, reached 5.327 percent today, the highest since April 2002.
Treasuries strengthened today even as government data showed retail sales climbed. Benchmark two-year note yields fell 2 basis points to 5.08 percent, and 30-year yields dropped 10 basis points to 5.3 percent. The 10-year note yield climbed to 20 basis points above two-year yields yesterday, the most since May last year.
Momentum Gauge
``People have come in to take advantage of some really higher yields,'' said David Coard, head of fixed-income trading in New York at Williams Capital Group.
One gauge of momentum has signaled the past two weeks that Treasuries' were poised to rebound. The 14-day relative strength index for the futures contract on the 10-year note was 16 today, the 10th straight day it has been under 25. Readings below 30 indicate the note's price may rise, while readings above 70 indicate it may fall.
Higher Treasury yields raise costs for consumers and companies. The average 30-year fixed mortgage rate was 6.53 percent last week, up from 6.15 percent a month earlier, according to McLean, Virginia-based Freddie Mac, the second- largest buyer of U.S. mortgages after Fannie Mae. The increase adds about $50 a month to payments on a $200,000 mortgage.
Yields on corporate bonds jumped about a half-percentage point to an average of 6.63 percent in the past month, index data from New York-based Merrill Lynch & Co. show. Hewlett- Packard Co., the Palo Alto-based computer maker, yesterday sold $2 billion of floating-rate notes after having to raise the yields amid the sell off in Treasuries.
Hedge Fund Losses
Demand for Treasuries also rose today after the Wall Street Journal and Business Week reported yesterday that a Bear Stearns Cos. hedge fund lost value in the first four months of the year because of investments in mortgages made to riskier borrowers. Russell Sherman, a Bear Stearns spokesman in New York, declined to comment.
``They're not the only ones holding'' similar securities, said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc. The firm is one of 21 primary dealers that trade with the Fed.
Emerging market debt rallied today, signaling investors weren't pulling back from riskier assets.
The yield to the 2015 call on Brazil's 11 percent bonds due 2040, a proxy for emerging-market debt, declined 5 basis points to 6.20 percent, according to JPMorgan Chase & Co.
`Permanent Feature'
Gains in Treasuries helped European debt pare some losses. European government bonds fell today, pushing 10-year yields to the highest since August 2002. Germany's benchmark 10-year bond yielded 4.64 percent.
Treasury yields surged yesterday after former Fed Chairman Alan Greenspan said he expects an increase in benchmark yields and greater premiums on emerging-market debt.
In separate comments today, Greenspan said low long-term rates are ``not a permanent feature.'' He spoke today via video- link to a conference in Mexico City.
Foreign investors and central banks have helped drive down U.S. yields. These investors doubled their holdings of Treasuries to $2.1 trillion in the five years ended February, according to Treasury Department data.
`Unambiguously Strong'
Statistics today suggested the economy is strengthening. Retail sales in the U.S. jumped 1.4 percent in May, the most in more than a year, a Commerce Department report showed.
``If you can't take the market down on unambiguously strong data it's a sign of an oversold market,'' said Wan-Chong Kung, who helps oversee $36 billion in fixed income at FAF Advisors in Minneapolis, the asset-management arm of U.S. Bancorp.
Regular 10-year notes yielded about 2.47 percentage points more than 10-year Treasury Inflation Protected Securities. The difference was near the widest since April, a sign of increasing demand for notes that hedge against inflation.
Producer prices may have risen 0.6 percent in May, after a 0.7 percent jump in April, according to the median estimate of economists surveyed by Bloomberg News before the government's release of the data tomorrow. Consumer prices likely increased 0.6 percent last month, compared with 0.4 percent in April, a separate survey showed. The government releases the consumer price data on June 15.
Inflation expectations may increase further, pushing 10- year note yields as high as 6 percent later this year, Morgan Stanley strategists Joachim Fels and Manoj Pradham wrote in a research note dated today.
Options on fed funds futures show about 33 percent of investors expect at least one rate cut this year, while 34 percent expect at least one increase. The rest expect no change. A month ago, 74 percent of traders expected one or more Fed rate cuts by the end of 2007, with no bets on an increase.
Goldman Sachs Group Inc. and Merrill, which predicted the Fed would cut rates this year three or more times, abandoned their forecasts last week.
Merrill's MOVE Index, a volatility gauge based on prices of over-the-counter options on Treasuries maturing in two to 30 years, reached 85.2 yesterday, the highest since July 7, 2005.
No comments:
Post a Comment