Wednesday, May 18, 2011

Dismal Data Boost Treasurys

Dismal Data Boost Treasurys


The steady drumbeat of dismal U.S. economic data continued Tuesday, driving investors into safe-haven Treasurys and pounding key yields down to five-month lows.

Disappointing U.S. housing and industrial-production figures are the latest underwhelming indicators in recent weeks as the market continues to focus on slowing growth. Inflation, the main threat to bond's yields, remains the least of considerations.

Dimming growth prospects also undercut the appeal of riskier assets such as stocks and commodities, adding to the flight to safety.

"For now, the path of least resistance is lower yields," said Mark MacQueen, partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $9.5 billion in assets.

Late afternoon, the benchmark 10-year note was 9/32 higher to yield 3.118%. The yield earlier touched 3.096%, lowest since Dec. 7, when the yield last traded below 3%. Bond yields move inversely to their prices.

The 30-year bond rose 25/32 to yield 4.233. The two-year note was flat to yield 0.520%.

Chris Sullivan, who oversees $1.77 billion as chief investment officer in New York at the United Nations Federal Credit Union, said the 10-year note's yield—which traded above 3.5% in early April—could test the 3% threshold in the short term. He said a break of that barrier could push the yield down to 2.92%.

Mr. MacQueen said 3% is possible in the near term, though he said the market is overbought and at risk of corrective selling. But, he added, a fall below 3% "will take an equity selloff, sovereign crisis or measurable deterioration of the economy."

Many investors also have cut holdings in stocks and commodities in favor of Treasurys over fears that demand for risky assets could falter once the Federal Reserve completes its $600 billion Treasury bond buying program in June.

The Fed's quantitative-easing measures to juice the economy, launched in November, have been a major driver pushing up prices of risk-based assets.

Investors are worried about U.S. growth if monetary stimulus is pulled back at the same time fiscal stimulus is stymied by budget cutting in Washington.

In addition, rallying Treasury prices on their own have caused an updraft, as investors betting on price declines—or "shorting" the market—are forced to purchase securities, and increase demand, to unwind those bets.

Kevin Walter, head of Treasury trading at BNP Paribas, said Tuesday's data forced some hedge funds to cover shorts, especially as the 10-year yield broke 3.14%, a level it has failed to close at in each of the past week's sessions.

Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, said some investors were "caught off guard" by the continued decline in yields. He expects more unwinding of shorts as the 10-year yield moves closer to 3%.


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