Investors should brace for wild swings in the US Treasuries market next week in advance of the government's March payrolls data. Anxiety over whether fund managers and central banks world-wide are finally tired of funding the United States' massive deficit could renew selling in US government debt, analysts and investors said on Friday.
"There's a lot of deficit spending. It all adds up to a supply and demand imbalance," said Andrew Richman, fixed-income strategist at SunTrust Private Wealth Management in Palm Beach, Florida.
Fears about federal borrowing to finance various economic programs, including the overhaul of the US healthcare system, hit fever pitch on Wednesday. Investors dumped Treasuries after a weak five-year auction, part of the $118 billion note supply this week. Benchmark yields, despite a modest recovery on Friday, were on track for their biggest single-week drop this year.
Some analysts pointed to the yield inversion between the 10-year Treasuries and 10-year interest rate swaps as the latest symptom of the market's concerns over the government's growing debt load which could lead to a crisis seen in Greece. The Congressional Budget Office forecast the federal debt will hit $20.3 trillion in 2020, double the level projected at the end of 2009.
Fitch's downgrade of Portugal and less bidding from foreign central banks at this week's auctions of two-year, five-year and seven-year notes also fanned the perception of higher risks to own public over private debt, analysts said.
Until this week the Treasury's debt auctions had gone without a hitch, helped by the Federal Reserve's vow to hold interest rates low for an "extended period."
Four days ago, the 10-year swap yield moved into a discount versus Treasuries for the first time ever. The yield on 10-year swaps has historically traded above that on 10-year Treasuries partly because of the default risks between the two counterparties, typically two top-rated banks, which are exchanging fixed-rate and floating-rate payments.
But many investors do not hold such a grim view of Treasuries. "I don't think Treasuries are worth less than a J.P. Morgan," Bill Chepolis, portfolio manager at DWS Investments in New York said of the No 2 US bank.
RELIEF FROM BAD NEWS:
After a chaotic week, some analysts see a comeback for Treasuries, especially if the government's March payroll figure set for next Friday falls short of forecast. "We need some economic data that disappoint here. Treasuries could go up on those news," SunTrust's Richman said.
Economists in a recent Reuters poll predicted a net job gain of 190,000 in March, which would be the biggest monthly increase since March 2007 when it grew 239,000.
In advance of the payroll report, traders will get private-sector job readings from ADP and Challenger, Gray & Christmas. Other data next week include monthly car sales and national factory activity figures from the Institute for Supply Management. Meanwhile, investors reckoned this week's bond sell-off opened up opportunities for bargain-hunters. The 10-year yield ended just below a relatively enticing 4 percent, a level not seen in more than nine months.
"They are worth a stab here," DWS's Chepolis said. Any bounce will likely be short-lived, as worries over the government's heavy borrowing and its upward pressure on yields will persist, analysts said. "We could see a short-term rally in bonds, but the longer term trend is that yields will head higher," Richman said.
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