TREASURIES-Bonds set for worst month in 5 yrs as GDP falls

The bond bubble is about to burst (this year).

This is the ultimate bubble.

Are you ready for the “Greatest Depression”?


* Anxiety about ballooning supply cap bond’s gains

* Treasuries on track for worst month in nearly 5 years

* Long-dated debt set for weakest month in about 16 years

NEW YORK, Jan 30 (Reuters) – The U.S. Treasury bond market crashed back to earth in January after a high-flying 2008, as fears over the government’s mammoth borrowing needs overshadowed evidence of further economic contraction.

U.S. government securities, despite their price gains on Friday, were on track for their worst month since April 2004, dragged down by a dramatic sell-off in long-dated Treasuries.

“It’s been an ugly month,” said Ralph Manigat, senior bond strategist with 4Cast Ltd. in New York.

On a month-to-date basis, Barclays Capital’s Treasury total return index was down 2.80 percent through Thursday. In 2008, it rose 13.74 percent, the largest annual gain since 1995.

But the Treasuries market managed to end a brutal month on positive note, as safe-haven bids emerged after a raft of dismal data on growth, factory activity and consumer sentiments.

The government said gross domestic product, its broadest measure of the economy, fell at a 3.8 percent annual rate in the fourth quarter, the steepest rate of decline in 27 years.

While the overall figure was not as grim as analysts had predicted, the details of the latest GDP report suggested even more turbulent economic data ahead. [ID:nN30348995].

The price on benchmark 10-year Treasury notes <US10YT=RR> last traded up 15/32. Their yield, which moves inversely to price, was 2.82 percent, down from 2.87 percent late Thursday but up from 2.21 percent a month earlier.

The 30-year bond suffered a more dismal start to 2009 than the 10-year, after they both surged in late 2008 when investors flocked to them as safe havens from the gyrations on Wall Street.

The long bond last traded up 1-3/32 in price, paring an earlier gain of 2 points. The 30-year yield <US30YT=RR> was 3.56 percent, down from 3.62 percent late Thursday and up from 2.68 percent at the end of December.

On a month-to-date basis, Barclays Capital’s 20-year-plus Treasury index was down 12.59 percent through Thursday. That would be the biggest monthly drop since the index began in 1992. In 2008, the index on long Treasuries jumped 33.72 percent, its biggest annual gain ever.

BEYOND SUPPLY

The government is widely expected to need at least $2 trillion to pay for this year’s budget deficit and various bailout programs, including a $825 billion stimulus plan.

In January, the Treasury Department sold some $616 billion in bills and notes, up sharply from $289 billion a year ago.

The monthly offering of debt is predicted to ratchet up amid speculations of the Treasury reintroducing seven-year notes and enlarging the amounts of other maturities.

The Treasury will announce details on its February refunding next week.

Adding to fears of the federal debt burden on long-term inflation were worries about easing foreign demand, especially from China, which is the largest holder of U.S. Treasuries. Tension between the United States and China escalated recently as top U.S. and Chinese officials exchanged jabs on economic policies.

January’s bond sell-off intensified on traders’ disappointment over the Federal Reserve’s reticence this week to buy long-dated Treasuries, which would help lower mortgage rates and other borrowing costs.

“The market was also a bit disappointed by the Fed’s lack of expediency in buying long-dated Treasuries,” said Michael Pond, Treasury strategist with Barclays Capital in New York.

Next week, the Treasuries market will likely stay choppy as traders assess the inflation risk from ballooning Treasuries supply and deflation risk stemming from another likely dismal January jobs report, analysts said.

Among shorter maturities, two-year notes <US2YT=RR> were up 3/32 in price for a yield of 0.94 percent, up from 0.97 percent on Thursday and 0.77 percent a month ago. (Additional reporting by Chris Reese; Editing by Dan Grebler)

Fri Jan 30, 2009 3:56pm EST
By Richard Leong

Source: Reuters

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