‘TREASURY BULLS EXPECT YIELD TO PEAK AT 4%,’ in the Wall St. Journal via

In Uncategorized on February 8, 2010 at 23:38

Treasury bulls expect yield to peak at 4%


At the start of the year, the consensus was that long-term U.S. Treasury debt would be the dud investment of 2010. Just weeks later, some investors are beginning to reconsider.

With Greece in turmoil and threatening to spread its woes throughout Europe, Treasurys are again benefiting from their safe-haven status. Treasury debt prices surged this past week, pushing their interest rates, or yields, lower.

Late Friday in New York, the 10-year Treasury note yielded 3.55%, its lowest since Dec. 17.

While the risk of a default by Greece or any other sovereign borrower remains low, the troubles are at least reminders of the fragility of the global economic recovery.

As fear spread, investors bailed out of risky assets like European bonds and the euro and parked their money in the U.S. dollar and U.S. government debt. If the trend continues, that could be welcome news for the U.S. government as it seeks to finance its record deficit.

“Over the next few months, if the sovereign-risk story were to worsen, I believe U.S. Treasurys could actually benefit,” said Barclays Capital U.S. fixed-income strategist Amrut Nashikkar. Sovereign-debt worries have coincided with fresh doubts about the strength of the U.S. economic recovery, which have also helped drive Treasury yields lower.

A weaker economy would cool inflation worries, which typically force interest rates higher to compensate investors for the risk.

Most observers believe these are short-term concerns. They say a growing mountain of U.S. government debt and a stronger economy will weaken bond prices. But Treasury bulls say the benchmark yield will probably peak at 4%. They see an anemic recovery, with a high risk of a double-dip, as consumers and governments in the U.S. and elsewhere try to work down their debt after the recent credit boom and bust.

That would drive inflation lower and make cheaper Treasurys a bargain, particularly after the runaway gains in riskier assets last year. “There will be a great buying opportunity around 4% on the 10-year yield,” said Dave Chappell, portfolio manager at Threadneedle Asset Management in London, which has about $90 billion under management.

“I would suggest that people looking for yields higher than that will be disappointed,” Mr. Chappell said.

Despite the market being flooded with $2.1 trillion in Treasury debt last year, the benchmark Treasury yield has stayed at an historically low level, churning between 3.2% and 3.9% for most of the past year.

The Treasury Department will borrow another $81 billion this week, with auctions of three-year, 10-year and 30-year debt planned. Treasury could borrow as much as $2.45 trillion this year, an unprecedented amount.

This surge in debt would, in normal times, result in higher interest rates, just as it would for any other borrower. The U.S. government is borrowing relatively cheaply now, but the rough consensus is that 10-year Treasury yields will end the year around 4.5%, the highest since October 2007.

There could be upward pressure on yields even in the short term. The economy is still enjoying an inventory-led production bounce that is bolstering economic data. Easy comparisons from a year earlier could result in some scary inflation numbers.

Yet, Treasury bulls note that the global economy hasn’t yet shown an ability to thrive without government support, which is being withdrawn in various parts of the world.

“If China is going to tap the brakes, there’s another source of inflation that goes away,” said Russ Kampfe, portfolio manager for Utimco, the investment management company for the University of Texas and Texas A&M University.

Mr. Kampfe also called Treasury yields around 4% “the bargain of the year, unless circumstances have changed drastically.”


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