Bonds Set for Boost at Month's End

By MIN ZENG Bond-market bulls will have another thing to cheer this week: month-end buying. The technical trade tends to lift demand for U.S. Treasurys at the end of every month, typically benefiting the long end of the curve, as fund managers who seek to match a benchmark index have to lengthen the average maturity of their holdings. This month could see an exceptionally large extension because February, like May, August and November, is a quarterly refunding month. Barclays Capital, a major index provider, and unit of Barclays PLC, will release the index-extension data at the end of this week. To get that far in the week, the market will first have to deal with a host of other events, including Federal Reserve Chairman Ben Bernanke's semiannual testimony to Congress and a round of note sales totaling $94 billion. An underlying safe-haven bid could come from persistent worries about the health of the banking system in both the U.S. and in Europe. Michael Pond, an interest-rate strategist in New York at Barclays, predicted the benchmark index for Treasurys may be extended by 0.18 year, or 2.16 months, the largest amount since August 2008, when it was 0.23 year (3.76 months), and considerably more than the extensions of 0.01 year, or 0.12 months, in each the past two months. "You are going to see a bit of a decent rally later [this] week as a large extension traditionally means bigger demand at month-end," said Jeff Given, fund manager at John Hancock Advisers LLC in Boston. Mr. Given expects the demand to help push the 10-year note's yield back to the mid-2.60% from 2.772% late Friday. Bond yields fall when prices rise. But not all bond fund managers who follow the indexes match the monthly adjustments. Only bond funds that mimic the changes in the indexes will be forced to buy. Actively managed funds could stay out of the fray if they are enticed by higher yields in other markets, such as mortgage-backed securities and corporate bonds. Chris Sullivan, chief investment officer at the United Nations Federal Credit Union in New York, is one of them. He said he is underweight Treasurys and prefers mortgage debt. Write to Min Zeng at min.zeng@dowjones.com