Treasuries tumble, driving two-year yields to an eight-month high

The yields are not rising because the economy is improving.

They are rising because investors are selling Treasuries to get out of the bond bubble and the US dollar!

Don’t miss:
Jim Rogers on CNBC: I expect a currency crisis (06/04/09):
“The Chinese don’t wanna get trapped in long bonds if something does happen to the dollar, which I expect and they expect. They don’t wanna get stuck and they’re sitting there with 30 year bonds, they’re dead.”
Geithner tries to assure Chinese investors, draws laughter from the audience (BBC News)
Rising US bond yields may spark Credit Crisis II (Reuters)
Bond Vigilantes Confront Obama as Housing Falters (Bloomberg)
Marc Faber: U.S. will go into Hyperinflation, Approaching Zimbabwe Levels (Bloomberg)
US Will Eventually Lose Its AAA Credit Rating: Bill Gross (Bloomberg)
U.S. Treasury Blues: The Bond Bubble Has Burst (Barrons)

“Obama may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008.”

Every investor (with a brain left) knows that Obamanomics will fail and wants to get out of Treasuries and the US dollar.


Treasuries Tumble as Jobs Report Renews Fed Rate Speculation

June 6 (Bloomberg) — Treasuries tumbled, driving two-year yields to an eight-month high, as traders speculated the Federal Reserve may boost interest rates later this year after a report showed the U.S. lost fewer jobs than expected in May.

Treasury two-year note yields surged the most in almost a year as the smallest decline in U.S. payrolls since September bolstered expectations the worst of the recession may be over. U.S. debt fell for a third consecutive week as oil touched a seven-month high, heightening speculation inflation will accelerate as the labor market bottoms out.

“There are more people taking the doomsday scenario off the table and thinking a pre-recovery is in place,” said Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal-asset management division. “Rates are moving up. The Fed could move the fed funds up in the fourth quarter of this year.”

For the week, the two-year note rose 38 basis points, or 0.38 percentage point, the most since the five days ended June 13, to 1.29 percent, according to BGCantor Market Data. The price of the 0.875 percent security maturing in May 2011 fell 23/32, or $7.19 per $1,000 face amount, to 99 6/32.

A 33 basis point jump in the two-year note yield yesterday was the biggest one-day increase since a 47 basis point surge Sept. 19, when then-Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke announced plans for what became the
$700 billion Troubled Asset Relief Program.

Rate Rise

Yields on the benchmark 10-year note touched 3.8972 percent yesterday, the most since Nov. 4. For the week, 10-year yields rose 37 basis points, the most since rising 40 basis points in the week ended March 21, 2003. Thirty-year bond yields touched 4.7130 percent, the highest since July 23, and gained 30 basis points on the week.

Traders see a 70 percent chance the Fed will raise its target rate for overnight loans between banks at its November policy meeting. The bets increased from 24 percent a week ago, according to futures traded on the Chicago Board of Trade. Eighty-eight percent of traders see no change in the rate at the central bank’s meeting this month.

The last time central bank officials raised rates after holding steady was June 30, 2004, when they raised the benchmark rate to 1.25 percent from one percent to slow economic expansion. In subsequent years, then-Fed Chairman Alan Greenspan was criticized for not increasing rates sooner.

‘Fear of Tightening’

“It is way too early to think about the Fed tightening given the state of the economy,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., a brokerage for institutional investors, said yesterday. “With the fear of tightening, people are willing to take profits now.”

Payrolls fell by 345,000, the smallest decrease in eight months, after a revised 504,000 loss in April, the Labor Department said yesterday in Washington. The unemployment rate increased to 9.4 percent, the highest since 1983. Payrolls were forecast to drop 520,000, according to the median forecast of 76 economists surveyed by Bloomberg.

“It’s going to be perceived as the worst is behind us,” Richard Schlanger, who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investments in Boston, said yesterday. “Treasury yields just have to move higher in order to compete and attract investment.”

‘Runaway Inflation’

The spread between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook for consumer prices, climbed 15 basis points on the week to 2.01 percent, the highest since August. The difference averaged 2.23 percentage points over the past five years.

Crude oil touched $70.32 barrel yesterday, the highest level since Nov. 5. Gold has rallied from last year’s low of $682.41 an ounce in October to as high as $992.10. Gold futures for August delivery fell 1.8 percent this week, as speculation the worst of the recession is over reduced demand for bullion as a store of value.

“The talk will be of runaway inflation before the Fed starts to tighten,” David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $18 billion, said yesterday. “They will not put the fed funds rate in play before they see the whites of the eyes that the economy is growing.”

Treasuries fell 2.1 percent so far in June, according to Merrill Lynch & Co.’s Treasury Master Index. For the year, U.S. government debt lost 6.2 percent, the index shows, as President Barack Obama borrows record amounts to try to snap the deepest recession in at least 50 years and service budget deficits.

Record Borrowing

The difference in yield between two- and 10-year notes touched 2.81 percentage points yesterday, the most ever. It narrowed to 2.53 percentage points, falling one basis point for the week.

The U.S. will auction $35 billion in three-year notes, $19 billion in 10-year securities and $11 billion in 30-year bonds next week.

Obama may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to Goldman Sachs Group Inc., one of 16 primary dealers that trade with the Fed. The budget deficit is projected to reach $1.845 trillion in the year ending Sept. 30 from last year’s $455 billion.

Neither Stability Nor Growth

Fed Chairman Ben S. Bernanke said large budget deficits threaten financial stability and the U.S. can’t continue to borrow at the current rate

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to the House Budget Committee on June 3. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

The Fed bought $15 billion in U.S. debt in two purchase operations this week, part of its $300 billion, six-month plan to lower consumer borrowing costs. Yields on 10-year notes have risen around 130 basis points since the central bank announced the program on March 18.

Higher yields complicate the Fed’s mission and could dampen any recovery as higher borrowing costs restrain growth. The average rate on a 30-year home loan rose to 5.29 percent for the week ending June 5 from 4.91 percent a week earlier, according to Freddie Mac, the McLean, Virginia-based mortgage buyer.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net.

Last Updated: June 6, 2009 09:51 EDT
By Susanne Walker

Source: Bloomberg

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