Sunday, June 7, 2009

Imminent increase in interest rates.

The bloodletting in longer-term Treasurys may finally ebb amid a growing feeling that better economic data could spur the Federal Reserve to raise rates sooner than expected to stem inflation.
A push to the key 4% level for the 10-year yield as soon as this week, however, isn't out of the question. The 10-year yield hit 3.91% Friday after a better-than-expected May jobs report, before finishing at 3.861%, up 0.385 percentage point on the week. Rates could rise further heading into the government's sales this week of $19 billion in reopened 10-year notes and $11 billion in 30-year paper. But a jump much higher is unlikely for a while.
"There are probably few reasons for 10-year yields to rise to significantly higher levels," said Colin Lundgren, head of institutional fixed income at RiverSource Investments in Minneapolis. "People are feeling better about inflation. I don't think the threat is such that yields will go wild here."
Rising inflation hurts long-dated Treasurys as higher prices eat into the fixed returns, but longer-term securities become much more attractive to investors in times of low inflation.
The pressure on yields could switch to the short end if suspicions continue to increase that policy makers might be thinking about a more imminent increase in interest rates. Late Friday, the two-year yield stood at 1.307%, up 0.377 percentage point on the week after the number of jobs lost in May was far fewer than economists had expected.
"People are starting to question whether the Fed will for sure be on hold for the next two years," said Carl Lantz, a fixed-income strategist at Credit Suisse in New York. "Doubt is starting to creep in and I think rightly so."

For further details visit as : online.wsj.com/article/SB124442460341392937.html

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