Monday, June 11, 2007

Managers Lower Treasury Exposure

From Bloomberg:

The biggest rout in the Treasury bond market in three years is making Wall Street's bond bulls more bearish.

Investors are ``throwing in the towel,'' said Robert Auwaerter, who oversees about $350 billion as head of fixed- income investments at Vanguard Group in Malvern, Pennsylvania.

Fourteen of the 21 banks and securities firms that underwrite the government's debt changed their outlooks for lower interest rates or increased forecasts for bond yields last week. Fund managers who oversee $1.34 trillion said Treasury and agency securities fell to 26 percent of their holdings from 36 percent as of May 18, according to a survey by Ried Thunberg & Co., a Jersey City, New Jersey-based research firm.

The combination of U.S. government reports showing rising labor costs and lower worker productivity with a surprise increase in New Zealand rates triggered the biggest one-day rise in 10-year Treasury yields since May 7, 2004. Even Goldman Sachs Group Inc. and Merrill Lynch & Co., which predicted the Federal Reserve would reduce its target rate for overnight loans between banks this year, abandoned their forecasts.

``Momentum could be toward even higher yields in the next couple weeks,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. ``If rates rise overseas, they will become competitive for the U.S. and therefore rates here have to rise.''

A majority of the big trading firms are now a bit more bearish on bonds. They have decreased their holdings pretty substantially within the last month. That means there is less upward pressure on bond prices. It also partially explains the recent increase in yield -- fund manager liquidation.

If these managers continue to liquidate, expect yields to increase.