Testing week for US bond investors

[Renegade]

By Michael Mackenzie in New York

Published: August 10 2009 18:23 | Last updated: August 10 2009 18:23

US bond investors are braced for a testing week, dominated by record $75bn in debt sales by the US Treasury and the Federal Reserve’s policy meeting, which concludes on Wednesday.

Treasury yields have been rising and are back at levels last seen in early June, with the yield on 10-year notes trading at 3.84 per cent on Monday.

Traders would not be surprised to see the benchmark test 4 per cent ahead of a $23bn auction on Wednesday.

The sale will be held about an hour before the Fed’s meeting finishes, which could result in lacklustre demand for the new notes.

David Ader, head of government bond strategy at CRT, said his research and trading house was “leaning” towards a bearish view of the Treasuries market with a test of 4 per cent yield level for the 10-year note.

“The trading environment is not very liquid, volumes are low and the risk appetite of dealers is also limited,” he said.

Traders face the auction of $37bn in three-year notes on Tuesday and $15bn of 30-year bonds complete this week’s debt sales on Thursday.

While the central bank is expected to reiterate that rates will remain low for an extended period, investors are focused on the outlook for the Fed’s policy of purchasing Treasuries and mortgages.

“Uncertainty about the fate of the Fed’s Treasury purchase program is likely to make investors cautious in bidding for the new 10-year note,” said Lou Crandall, economist at Wrightson Icap.

The Fed has nearly completed meeting its target of buying $300bn in Treasuries, with about $250bn already purchased. But last week, the Bank of England decided to boost its quantitative easing limit. That has some people thinking the Fed could seek to buy more Treasuries in order to keep market rates low.

At its current pace of buying, the Fed’s Treasury programme should finish in six weeks, while the purchase of $1,250bn in mortgages should be completed by the end of the year.

Some analysts think the Fed should adopt a flexible approach and extend the terms of the Treasury buying programme until the end of the year.

That way, the Fed could buy fewer mortgages and more Treasuries, should yields rise sharply in the coming months.

“It would make sense for the Fed to give themselves room to buy more Treasuries later this year, if that is required,” said George Goncalves, head of fixed income strategy at Cantor Fitzgerald.

http://www.ft.com/cms/s/0/6f48312a-8...44feabdc0.html