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Treasuries, Dollar Pessimism Rises on Speculation Slump to End
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By Ye Xie

Aug. 12 (Bloomberg) -- Investors are turning more bearish on Treasuries and the dollar on speculation their appeal will diminish as the first global recession since World War II shows signs of easing, a survey of Bloomberg users showed.

Expectations for higher yields on Treasuries and a weaker dollar over the next six months increased, according to 2,345 respondents from New York to Tokyo to London in the Bloomberg Professional Global Confidence Index. For the first time since November 2007, when the monthly survey started, Bloomberg users forecast the global economy will expand.

“Yields are going to go higher as the economy stabilizes,” said Sean Simko, a survey participant who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “In the end, people feel more secure.” He expects investors will require higher yields on longer-term debt to compensate for the threat of inflation.

Confidence in the global economy rose to 58.1, from 39.1 in July, according to the survey. The measure is a diffusion index, meaning a reading above 50 indicates Bloomberg users expect the economy to grow.

Expectations for an increase in 10-year Treasury note yields rose to 64.8 in August, from 64.1 a month earlier. In June, the index climbed to 73.7, the highest since Bloomberg began compiling the data. The index for central bank rates increased to 56.3, from 52.9.

Marketable Debt Increases

Ten-year yields surged 37 basis points to 3.85 percent last week, the most since 2003, as better-than-estimated reports on employment, home sales and manufacturing boosted confidence that the U.S. economy is recovering. Treasuries handed investors a loss of 4.74 percent this year, according to Merrill Lynch indexes.

President Barack Obama has pushed the nation’s marketable debt to an unprecedented $6.78 trillion in an effort to spur economic growth.

The so-called yield curve widened to 2.51 percentage points, from 2.37 percentage points at the end of July as investors demanded higher yields for longer maturities.

“The curve will be steeper as we continue to see the recovery taking hold,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “Inflation expectations, continued removal of risk- aversion trade, and supply -- these are three pretty heavy forces that confront the longer-dated interest-rate scenario.”

Yield Forecasts

Flanagan forecast the yield on the benchmark 10-year note will increase to 4.25 percent by year end, from 3.67 percent yesterday.

The 10-year yield will rise to 3.8 percent by year-end, according to the weighted average of 66 forecasts in a Bloomberg News survey that places an emphasis on the most recent estimates.

Consumer prices declined 1.9 percent in July from the year- earlier period, according to a separate Bloomberg survey. The market for Treasury Inflation Protected Securities shows traders expect inflation over the next 10 years to average 1.89 percent.

For 10-year German bunds, expectations for higher yields rose to 68.7, from 67.4, while sentiment on Japanese government bonds rose to 59.6 from 48.1.

The index of expectations for the dollar dropped to 38.8 this month, from 43.8 in July, according to the survey.

Dollar Index

The Dollar Index, which the Intercontinental Exchange Inc. uses to track the dollar against the euro, yen, pound, Swedish krona, Canadian dollar and Swiss franc dropped to 77.4 on Aug. 5, the lowest level since the weeks following Lehman Brothers Holdings Inc.’s collapse in September 2008.

Stronger U.S. economic data tended to weaken the dollar in the past few months as investors became more comfortable buying riskier, higher-yielding assets elsewhere.

That relationship may be breaking down. The dollar rallied to a seven-week high versus the yen on Aug. 7 after a Labor Department report showed U.S. employers eliminated fewer jobs last month than economists forecast.

“There’s a watershed shift in dollar sentiment,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, a survey participant. “Any acceleration of expectations for Fed tightening will allow the dollar to reassert itself.”

The Fed will keep its target lending rate at a range between zero and 0.25 percent at the conclusion of a policy meeting today, according to all 47 economists surveyed by Bloomberg.

Those surveyed in Brazil were more upbeat on the real, with the index rising to 69.4, from 66.5 in July. The real has gained 25 percent this year to 1.85 per dollar, the best performer among the 16 most-traded currencies tracked by Bloomberg.

In the U.K., survey participants expected the pound to continue to rally after gaining 13 percent this year versus both the dollar and the euro. The sentiment index for sterling rose to 62 from 50.1.

To contact the reporter on this story: Ye Xie in New York at [e-mail]
Last Updated: August 12, 2009 07:00 EDT