Credit Markets: A New Mood For Treasurys

WSJ(7/5) Credit Markets: A New Mood For Treasurys
05/07/2011 00:46

(From THE WALL STREET JOURNAL)

By Cynthia Lin and Min Zeng NEW YORK -- A three-month run-up in Treasurys prices may be running out of steam. Last week's selling streak, the longest such in months, has persuaded some analysts that yields have reached the bottom.

U.S. Treasury debt has sold off, pushing up yields, after a set of weak government debt auctions -- and has done so on notable trading volume. Until that point, prices had rallied since early April, fueled by a drumbeat of soft U.S. economic data and alarming headlines out of Europe.

On June 27, the benchmark 10-year yield touched a 2011 intraday low of 2.842%. It yielded 3.199% late Friday. The yield jump in the past five sessions is the largest weekly advance since August 2009, prompting some analysts to suspect the bull run may be fizzling out. Bond yields move inversely to prices.

Several analysts said they believe the past months of weak data that pushed up prices will be giving way to stronger economic growth and more attention to inflation.

Two pieces of economic news have lived up to Treasury bears' hopes. Chicago's June manufacturing index inspired market confidence on Thursday, jumping to 61.1 from 56.6 in May. The Institute for Supply Management followed up with figures on factory activity on Friday that showed that the U.S. manufacturing sector is expanding faster than expected.

It isn't just rosy economic reports that would fuel a selloff in Treasurys. With fears of a credit contagion contained for now in the bloc of euro-using nations, as Greece looks set to secure the short-term financing it needs, Treasury skeptics also are shining the spotlight on Washington.

"Prospects now appear good that the near-term risk to lower real rates from Greece will give way to the next circus -- the debt ceiling," said Eric Green, chief U.S. rates strategist at TD Securities.

Debate over the U.S. budget and lifting the limit on government borrowing is muddling along as the Aug. 2 deadline nears. If the $14.29 trillion debt limit isn't raised, the U.S. government would be unable to meet all its financial obligations, Treasury Department officials say.

Any missed interest payment would be classified as a technical default, possibly triggering rating downgrades and putting the value of U.S. government bonds in question.

Chris Ahrens, interest-rate strategist at UBS, says his firm sees benchmark yields as high as 3.25% in the near term because current levels don't reflect uncertainties about the debt ceiling.

Treasury bulls expect the U.S. debt limit to be lifted eventually and say that Europe's problems with sovereign debt aren't over, while the U.S. economic recover is still tepid. Seeing further room to rally, the bulls are buying on price dips, classifying the recent selloff as such.

"We had some pretty big pullbacks and . . . this provides a good buying opportunity," said George Goncalves, head of U.S. interest-rate strategy at Nomura Holdings. "I think we would stabilize and then would push lower in yields for one last time."

He doesn't expect a resolution of the euro zone's problems this summer and predicts benchmark yields could touch as low as 2.75%.

"I just don't see the economy having a lot of strength right now," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's private wealth-management unit.

Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center, echoes the view of the U.S. economy "muddling through." He sees 10-year yields sinking to as low as 1.50% next year, saying that "growth in the second half will be disappointing."

(END) Dow Jones Newswires