Biggest bond traders see worst over for Treasuries

Written by Bloomberg | Updated: Apr 3 2012, 08:53am hrs
The worst is over for the $10-trillion US Treasury market following the biggest quarterly rout since 2010, say Wall Streets largest bond trading firms.

After rising to as high as 2.4% last month from 1.88% at the end of 2011, the yield on the benchmark 10-year note will finish 2012 at 2.48%, according to the average estimate in a Bloomberg News survey of the 21 primary dealers that trade with the Federal Reserve. Thats the same as a January poll, suggesting the market isnt ready to declare a bear market in bonds after a 30-year bull run.

Signs of strength in the economy, which caused a 5.56% loss in bonds maturing in 10 years or more last quarter, may fade in the second half of 2012, the dealers say. Tax cuts are expiring, $1 trillion of mandatory federal budget cuts are due to kick in and $100-a-barrel oil is eating into consumer spending. With inflation in check, Fed chairman Ben S Bernanke said last week that the central bank will consider further stimulus, even after upgrading its economic outlook on March 13.

The back-up that weve seen over the past three or four weeks was not fully justified by what were seeing in the data, said Aneta Markowska, a senior US economist at primary dealer Societe Generale in New York. The 10-year yield will end the year at 2.25%, she said on March 27.

Primary dealer holdings of US government debt rose to $91 billion last month, from a net bet against the securities of $53.4 billion in May, according to the Fed. In the survey, 14 say the odds are that the Fed will need a third round of bond purchases, or quantitative easing, to bolster the economy.

The yield on the benchmark 10-year note climbed two basis points as of 12:33 pm in Tokyo, or 0.02 percentage point, to 2.23%, according to Bloomberg Bond Trader prices.