Justin Lederer Comments: Treasuries – Bonds Rise On Stocks, Bets On Fed Stimulus

January 7, 2012, Yahoo! Finance

U.S. Treasuries prices rose Friday as a choppy stock market and remarks from top Federal Reserve officials calling for more monetary stimulus fueled safe-haven bids for government debt ahead of next week’s $66 billion in coupon supply.

Persistent worries about the euro zone debt crisis also revived investor appetite for Treasuries, overshadowing evidence of further improvement in the U.S. labor market.

"Even if the economy is showing signs of growth, there is still a high probability of more Fed easing. The Fed seems not happy with where the economy is," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York.

Several top Fed officials on Friday called for more stimulus to help the housing sector, whose struggle has been a drag on the U.S. economy and the banking system.

Suggestions that the U.S. central bank might embark on another quantitative easing program to help the housing market, including buying mortgage-backed securities, also fueled expectations that it could leave policy rates near zero into at least mid-2014, a year longer than what the Fed has so far promised, analysts said.

Some short-term interest rate futures for delivery in 2014 touched contract highs on that view, while high-coupon mortgage bonds struggled on worries that more Fed stimulus would lead to increased refinancing which hurt their value.

Meanwhile, Treasuries’ rebound on Friday enabled the market to pare its losses in a holiday-shortened week, with 30-year yields on track to rise 12 basis points on the week.

Benchmark 10-year notes finished up 10/32 in price at 100-11/32. Their yield was 1.96 percent, down 4 basis points on the day, retreating from 2.05 percent set earlier.

The 30-year bond rallied almost 1 point to 102-4/32, erasing earlier losses.

Its (Euronext: ALITS.NX – news ) yield fell to 3.02 percent, down 5 basis points from late Thursday.

U.S. Treasuries outperformed German Bunds with their 10-year yield spread narrowing to 11 basis points from 12 basis points on Thursday. Last Friday, that spread ended at 5 basis points.

U.S. blue-chip stocks closed modestly lower with the S&P 500 (SNP: ^GSPC – news ) index down 0.25 percent.

EYES ON SUPPLY

With the stronger-than-expected payroll report in the rear-view mirror, investors will look to next week’s sovereign debt auctions on both sides of the Atlantic (Stuttgart: A0J3C9 – news ) as a proxy for risk-taking in the early days of 2012, analysts said.

A drop in the U.S. jobless rate to a near three-year low in December was encouraging, but the festering fiscal woes across the euro zone and worries over the fate of its common currency, which hit a 16-month low against the dollar on Friday, have kept investors on the defensive.

"The biggest risk comes from outside our economy. With Europe (Chicago Options: ^REURUSD – news , they are stuck between a rock and a hard place. All their options are bad," said George Feiger, chief executive officer at Contango Capital Advisors in San Francisco, which oversees about $1.3 billion in assets.

Feiger also cited China’s slowdown as a risk. In an uncertain investment climate, analysts expect solid bidding at the U.S. Treasury’s upcoming debt auctions, starting with a $32 billion sale of new three-year notes on Tuesday.

"Treasuries being a U.S. dollar-denominated asset is where investors want to be," Cantor’s Lederer said.

The same cannot be said for the some 35 billion to 40 billion euros in European sovereign debt set for sale next week in the absence of a sweeping solution for the region’s debt problem.

Bond offerings from Spain and Italy will garner the most scrutiny in light of their heavy debt load and the recent surge in borrowing costs, which are considered unsustainable.

"We need to see an end-game for the euro as a currency, but that hasn’t happened yet," Contango’s Feiger said.