Current fiscal news Reply

By Matthew Brown and Wes Goodman Oct. 13 (Bloomberg) -- Treasuries rose for the first time in three days as investors bet the Federal Reserve will keep interest rates at an all-time low until late next year and the central bank prepared to buy securities. Ten-year notes led the gains after holidays in the U.S. and Japan. Fed Bank of St. Louis President James Bullard said yesterday that a falling unemployment rate is a precondition for an increase in the target interest rate from near zero. Treasuries fell last week after Fed Chairman Ben S. Bernanke said policy makers will tighten monetary policy once the economic outlook improves. “People are rethinking the negative spin on Bernanke’s comments of last week as there’s been no comments from the Fed saying they are thinking of raising rates sooner rather than later,” said Charles Diebel, head of European rate strategy at Nomura International Plc in London. “Treasury futures rose yesterday, so there is catch-up in the cash market today.” The yield on the benchmark 10-year note fell 3 basis points to 3.35 percent as of 7:12 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security due August 2019 increased 9/32, or $2.81 per $1,000 face amount, to 102 10/32. Trading of Treasuries was closed yesterday in the U.S., Japan and London, because of a public holiday in North America. U.S. 10-year note futures expiring in December rose 0.2 percent yesterday, and were little changed at 118 19/32 today. The Fed will hold off raising interest rates until the third quarter of 2010 as the recovery is likely to be too weak to lift employment and incomes, according to a September survey of 57 economists by Bloomberg News. Futures on the Chicago Board of Trade show a 61 percent likelihood that the central bank will increase the target rate from the current range of zero to 0.25 percent by April.

Goldman Downgrade
Goldman Sachs Group Inc., the biggest U.S. securities firm before converting to a bank last year, was cut to “neutral” by Meredith Whitney today, after the stock rose 34 percent since she upgraded the company to a “buy” recommendation on July 13. New York-based Whitney, who correctly predicted in 2007 that Citigroup Inc. would cut its dividend, said on Sept. 10 that Goldman Sachs “still has a lot of gas in its tank.” The Fed is scheduled to purchase notes due from May 2016 to August 2019 today. The Fed has purchased $294.064 billion of U.S. debt since March under a $300 billion program scheduled to end this month. “You want to see the economy start to recover in all its dimensions, output and trade” before raising rates, Bullard said in a Bloomberg Radio interview in St. Louis. “We do have some of those turning around now.”

Jobless Rate
The jobless rate rose to a 26-year high last month of 9.8 percent, the Labor Department said on Oct. 2. Retail sales in the U.S. probably fell in September as auto showrooms sat empty after the “cash for clunkers” program expired, economists said ahead of the Commerce Department report tomorrow. Purchases dropped 2.1 percent after rising 2.7 percent in August, according to the median forecast of 72 economists surveyed by Bloomberg News. Other reports this week may show inflation and factory production cooled last month, according to Bloomberg surveys. The financial crisis started with the collapse of the U.S. property market in 2007 and has triggered $1.62 trillion of writedowns and credit losses at banks and other institutions, according to data compiled by Bloomberg.

Inflation Surge
Now investors are preparing for another potential crisis: a surge in the cost of living spurred by the $11.6 trillion the Federal Reserve and the government has lent, spent or guaranteed to shore up the economy and the financial system. BlackRock Inc., Pacific Investment Management Co. and Vanguard Group Inc., which together manage $3.45 trillion, say investors are pouring money into inflation-linked debt even as consumer prices post the longest series of contractions since Dwight D. Eisenhower was president in 1955. “Investors are really taking the long view and trying to hedge inflation risk,” said Mihir Worah, who oversees the $15.4 billion Real Return Fund for Newport Beach, California-based Pimco, the world’s biggest bond manager. “That’s the biggest reason why we’re seeing the flows.” Treasury Inflation Protected Securities, or TIPS, have gained 7.9 percent this year, according to Merrill Lynch & Co. indexes, while Treasuries overall lost 2.8 percent. That’s the biggest outperformance since the U.S. first issued TIPS in 1997.

Cheap TIPS
Bernanke said at a Board of Governors conference Oct. 8 in Washington that while “accommodative policies” will be in place for an extended period, the central bank will be prepared to tighten monetary policy “to prevent the emergence of an inflation problem down the road.” TIPS remain cheap by historical measures. The difference in yield between 10-year TIPS and 10-year notes is 1.85 percentage points, compared with an average of 2.18 over the past five years. A survey of investors by Ried, Thunberg & Co. shows fund managers turned more bearish on Treasuries. The company’s index measuring the outlook through the end of 2009 fell to 45 for the seven days ended Oct. 9 from 46 the week before. A figure below 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 21 fund managers controlling $1.54 trillion. *T Related News and Information: Bond yield forecasts: {BYFC } World bond markets: {WB } Credit market watch: {CMW } Sovereign debt monitor: {SOVR } Credit crunch page: {WWCC } Short-term liquidity {SLIQ } Bonds for sale: {PREL } *T --With assistance from Steve Matthews in Oklahoma City and Kathleen Hays and Daniel Kruger in New York. Editors: David Clarke, Peter Branton.