Treasurys Rally As Worries About Economy Persist

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September 13, 2010, 3:14 P.M. ET.Treasurys Rally As Worries About Economy Persist
By Deborah Lynn Blumberg Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Treasury prices rose Monday, reversing losses posted late last week, as market participants remained on edge about the economic recovery and sought out low-risk U.S. government bonds.

Buyers came back in after three consecutive days of lower prices last week posted after some less dire bits of U.S. economic data. Overall though, the economic outlook remains very uncertain, leaving Treasurys in favor. Market participants Monday were setting up for what some believe could be a weaker U.S. retail sales report for August. The data are scheduled to be released early Tuesday morning.

Gains in the U.S. government bond market Monday came despite better economic reports from overseas. China, the world's second-largest economy after the U.S., over the weekend reported a stronger-than-expected increase in August industrial production. Retail sales there also rose sharply. The numbers signal the Chinese economy is growing at a robust pace, calming fears of a sharp downturn.

"The global economy might be looking okay, but that doesn't necessarily translate into a stronger U.S. economy," said Ira Jersey, director in the U.S. Interest Rate Strategy team at Credit Suisse. In the Treasury market, "we're seeing a little bit of an unwind from the pessimism that we saw last week," Jersey said.

In afternoon trade, the 10-year note's price was up 11/32 to 2.753% and the two-year was up 2/32 to 0.535%. The 30-year was up 10/32 to 3.850%. Gains came despite higher stock prices. The Dow Jones Industrial Average was up by 0.31% and the S&P 500 index was up 0.69%.

Jersey believes Treasurys will bounce around a range for a while, with the 10-year yield moving between a 2.65%-to-2.85% range. Credit Suisse's year-end projection is for a 10-year yield of 2.65%.

Treasurys were also up Monday after another Treasury purchase from the Federal Reserve. The Fed bought $3.4 billion in Treasurys maturing August 2016 to May 2020 out of $17.202 billion bids submitted. The Fed started small-scale buying in Treasurys last month, using proceeds from its maturing mortgage-backed securities holdings, as a way to push down long-term interest rates to support a slowing economy.

The Fed Monday also announced its latest Treasury buying schedule, which suggests an average operation size of about $3 billion, up from the $2 billion average for the previous nine operations. The first of the new set of purchases will be Wednesday, in the four to six-year sector. There will be one outright purchase of Treasury Inflation Protected Securities at the end of September.

Treasurys the last few weeks have deteriorated after rallying for much of the summer and spring. Before, investors were more concerned the economy would deteriorate in the second half of the year and sought safety in low-risk Treasurys. Some less dire data of late soothed some of those fears though, reducing demand for Treasurys. The 10-year yield is still around 40 basis points higher than it was at its recent low in August and the 30-year yield is some 30-odd basis points higher.

Many investors are convinced, however that given the very uncertain economic outlook, and with the Federal Reserve pledging to leave rates low for a while, Treasurys will eventually start to rally more consistently again.

"I don't think the bullish trend has been broken in Treasurys," said Brian Edmonds, head of interest rates at Cantor Fitzgerald & Co. "There are still buyers around," with any slip in price luring buyers back in.

Treasurys Monday also continued to be jostled around by corporate debt issuance, with another massive offering expected for this week. Treasury prices tend to weaken ahead of corporate debt issuance as issuers typically hedge against upward swings in interest rates by selling Treasurys before the bonds are issued. But when the corporate bonds price those trades are reversed, and that can cause that Treasury market to rally.

Edmonds cited an estimate of around $100 billion in corporate debt issuance for the month of September.

-By Deborah Lynn Blumberg, Dow Jones Newswires; 212-416-2206; deborah.blumberg@dowjones.com
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