By Lester Pimentel
Nov. 12 (Bloomberg) -- Treasuries will fall over the next six months as the U.S. increased borrowing to bail out its financial system, while government debt in Europe, Asia and Latin America rallies, a monthly survey of Bloomberg users showed.
Participants turned bearish on 10-year Treasury notes this month for the first time since March, while remaining bullish on government debt from Brazil, France, Germany, Italy, Japan, Mexico, Spain, Switzerland and the U.K., according to the Bloomberg Professional Global Confidence Index. The poll questioned 3,550 Bloomberg users last week.
``The No. 1 reason is supply,'' said Jason Brady, a survey participant and managing director at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees $4 billion in fixed income assets. ``You have Fed and Treasury actions which are supporting credit markets and causing a huge amount of issuance.''
The U.S. is boosting debt sales to fund such programs as the Treasury's $700 billion bank bailout and the Federal Reserve's purchases of commercial paper to thaw credit markets. Federal Reserve Chairman Ben S. Bernanke has made unprecedented use of the central bank's powers as lender of last resort, unlike his predecessor, Alan Greenspan, who relied on interest- rate cuts to stabilize turbulent markets. President-elect Barack Obama called on Congress Nov. 7 to pass economic-stimulus legislation.
Quarterly Borrowing
Last week the Treasury Department estimated that it will need to borrow $550 billion this quarter, more than triple an earlier forecast. New York-based Goldman Sachs Group Inc. said Oct. 29 the government's requirement this fiscal year that started Oct. 1 will almost double to $2 trillion.
The federal budget deficit may climb 58 percent to $687.5 billion for fiscal 2009 as U.S. debt swells and the slowing economy crimps tax receipts, according to a survey by the Securities Industry and Financial Markets Association of its members released Oct. 31.
Expectations that yields on 10-year U.S. notes will rise increased to 54.08 in November after reaching a seven-month low of 48.91 in October, according to the Bloomberg survey. The measure is a diffusion index, meaning a reading above 50 indicates that participants expect bonds to weaken and yields to go up.
Yields on 10-year U.S. notes fell 4 basis points, or 0.04 percentage point, on Nov. 10 to 3.75 percent, below their 200- day moving average of 3.79 percent, according to BG Cantor Market Data. The 4 percent security due in August 2018 gained 11/32, or $3.44 per $1,000 face amount, to 102 2/32. U.S. bond markets were closed yesterday for Veterans Day.
`Limit' to Fed Cuts
Concern the Fed is running out of room to cut interest rates also prompted traders to forecast higher yields. Futures on the Chicago Board of Trade show a 92 percent probability policy makers will reduce the 1 percent target rate for overnight bank loans by a half-percentage point when they meet on Dec. 16. The odds a week ago were 50 percent. The Fed has lowered the target rate nine times since September 2007, when it was 5.25 percent.
``There's a limit to how much the Fed can cut rates,'' said Suvrat Prakash, an interest-rate strategist and survey participant in New York at BNP Paribas Securities Corp., one of 17 primary dealers that trade Treasuries with the central bank. ``A cut in December will probably be seen as the last one. There's no more force for lower rates after that. That affects people's thinking.''
U.S. debt has returned 5.9 percent this year, including reinvested interest, after gaining 9.06 percent in 2007, according to Merrill Lynch & Co.'s U.S. Treasury Master index.
U.K., Spain, Japan
Treasuries rallied as stock losses and housing-price declines spurred demand for government debt. The Standard & Poor's 500 Index tumbled 35 percent this year, pushing investors to the safety of government debt. Home prices slid 17 percent in 20 U.S. metropolitan areas in August from a year earlier, according to the S&P/Case-Shiller price index.
``Right now, supply is being met by demand,'' Prakash said. ``Six months down the road, you may see demand lighten up once demand for safe assets shifts away.''
Bloomberg survey respondents in the U.K., Spain and Japan were the most bullish. In the U.K., the index was 35.09 in November, compared with 32.22 in October. For users in Spain, the index was 36.73, from 33.44. In Japan, the measure was unchanged at 36.79. Italy recorded the biggest increase in optimism for government debt, as the index fell to 37.05 from 44.94.
Speculation the European Central Bank will cut rates to shore up the region's economies is fueling expectations bonds will gain. Weaker growth in Japan is boosting demand for that country's debt.
Government bonds, which tend to perform best when the economy and inflation are slowing, gained 2.82 percent worldwide in the third quarter on average after falling 2.29 percent in the July-to-September period, according to Merrill's Global Sovereign Broad Market Index. They have returned 0.96 percent this month.
Expectations for currency appreciation were the highest in Japan, Mexico and Switzerland, the survey showed. The index for the yen was little changed at 71.23, from 71.89 in October. For Mexico it was 61.95, up from 43.41, and for Switzerland, it declined to 61.25, from 65.04.
To contact the reporter on this story: Lester Pimentel in New York atlpimentel1@bloomberg.net
