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U.S. treasuries seen headed for their best year since 2002

U.S. treasuries seen headed for their best year since 2002

U.S. Treasury notes, little changed today, were poised for their best year since 2002 on speculation the Federal Reserve will keep cutting interest rates next year to stop a housing meltdown from triggering a recession.
Investors are turning bullish on Treasuries, according to a survey by Ried, Thunberg & Co., a research unit of ICAP Plc, the world's largest inter-bank broker. The improvement in the firm's sentiment index comes as the Treasury Department prepares to sell US$22 billion of two-year Treasuries on Dec. 26 and US$13 billion of five-year securities December 27.
"If they go anywhere, they will be driven by safe-haven trades and yields will drop," said John Wraith, a strategist in London at Royal Bank of Scotland Group Plc. "We're expecting lower front-end yields."
The yield on the two-year note fell 1 basis point to 3.19 percent as of 11:09 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 3-1/8 percent security due November 2009 was at 99-29/32.
The two-year yield will probably be at about 3.18 percent by the end of March and the 10-year rate will decline to 4.05 percent, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.
An index of Treasury securities returned 8.2 percent in 2007, according to data compiled by Merrill Lynch & Co., the most since the U.S. headed for war with Iraq in 2002. Investors sought the relative safety of government debt as the collapse of the U.S. subprime-mortgage market caused at least US$80 billion in writedowns and losses at the world's biggest banks and securities firms, including Citigroup Inc. and UBS AG.
Fed Chairman Ben S. Bernanke trimmed the Fed's target rate for overnight loans between banks by 1 percentage point this year to 4.25 percent. The Fed and the European Central Bank also added money to the financial system to try to revive the corporate debt market.
The so-called TED spread, the difference between what the U.S. government and banks pay for three-month loans, indicates lenders are becoming more willing to do business, even though the interest rates they charge are still higher than earlier in the year.
The spread narrowed to 1.89 percentage points, from 2.10 percentage points two weeks ago. It was less than half a percentage point before the credit markets froze up in August.
Ried, Thunberg's index measuring attitudes toward Treasuries through the end of June rose to 52 from 48 in the week ended December 21. A number below 50 indicates investors expect prices to fall. The 32 investors surveyed by the Jersey City, New Jersey, company manage a combined US$1.23 trillion.
Most respondents said the Fed "has not permanently broken the liquidity squeeze," the survey showed.
The Securities Industry and Financial Markets Association based in New York recommended trading of Treasuries close in Japan today in observance of the emperor's birthday. It also recommended that trading close at 2 p.m. New York time and stay shut tomorrow in Japan, the U.K. and the U.S. for Christmas.
This year's rally has made Treasuries too expensive for Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore. Ten-year yields need to rise to 4.25 percent, even with the current Fed target rate, before he'll buy, he said.
"Yields are on the way up" in the U.S., Mitsubishi UFJ's Yamamoto said. "The economy, especially from the consumer side, is still okay."
Ten-year notes yielded 2.35 percentage points more than similar-maturity Treasury Inflation-Protected Securities, representing the rate of inflation traders expect for the next decade. The difference averaged 2.37 percentage points this year.


Updated : 2021-05-14 03:55 GMT+08:00