Treasuries Poised to Fall, Dollar to Weaken as Debt Sales Soar

By Daniel Kruger

Jan. 14 (Bloomberg) -- Treasuries will fall over the next six months and the dollar will weaken as the U.S. sells a record amount of debt to finance a budget deficit poised to exceed $1 trillion, a monthly survey of Bloomberg users showed.

Participants turned the most bearish on 10-year U.S. notes since September, while continuing to forecast declining yields on government debt from Germany, U.K. and Japan, according to the Bloomberg Professional Global Confidence Index. The survey, which questioned 2,991 Bloomberg users last week, showed the outlook for the dollar is the lowest since July.

The Treasury’s plan to sell as much as $2 trillion in debt to help the government fund bailouts of financial companies and a stimulus package comes as the Federal Reserve floods the financial system with dollars to end the freeze in credit markets. The amount of assets held by the Fed more than doubled to $2.14 trillion as of Jan. 7 from $909 billion in August, according to the central bank.

“The combination of selling a lot of Treasuries and printing a bunch of dollars to expand the Fed’s balance sheet isn’t necessarily a very positive dynamic over any kind of medium or longer term horizon,” said Jason Brady, a managing director at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees $4 billion in fixed-income assets. Brady participated in the survey.

Rising Yields

Yields on 10- and 30-year securities rose from record lows last month. The benchmark 10-year note yield was 2.31 percent at 6:35 a.m. in New York, up from 2.0352 percent Dec. 18, the lowest level since the start of the Fed’s daily data in 1962. The 30-year yield was 3.03 percent, up from 2.509 percent, the lowest since regular sales of the security began in 1977.

The survey results suggest investors expect increased U.S. debt sales to restrain gains during the recession that began last year. The median estimate of 70 economists surveyed by Bloomberg News is for gross domestic product to shrink 1.3 percent in 2009.

Expectations for 10-year Treasury yields rose to 55.93 in January from 47.02 in December, according to the survey. The measure is a diffusion index, meaning a reading above 50 indicates participants expect bond prices to fall and yields to rise.

The index for the dollar fell for a fourth month, to 45.53, the lowest since July, from 50.22. The currency closed at $1.3182 per euro in New York trading yesterday, down from $1.2330 in October.

Expectations for foreign exchange appreciation were the highest in Mexico, Japan and Switzerland, the survey showed. The index for the peso rose to 64.73 from 61.96 last month. For Japan it was 64.54, compared with 67.16 in December, while the index for the franc increased to 62.67 from 60.48. In Germany, a proxy for the euro, the index slid to 58.21 from 63.67.

Dollar Bear

The dollar will continue to fall because of its “zero interest rates, no growth -- if not outright recession -- and a huge increase in the funding needs of the country at a time when it appears the capital flows that have traditionally supported U.S. borrowing needs are diminishing,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto.

Osborne, who participated in the survey, forecasts the dollar will weaken to $1.55 per euro by the end of the year.

The Fed reduced its target rate for overnight loans between banks to a range of zero to 0.25 percent on Dec. 16 from 1 percent. U.S. government bonds returned 14 percent in 2008, including reinvested interest, the most since 18.5 percent in 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index.

Brazilian Bulls

Bloomberg survey respondents in Brazil, Mexico and Japan were the most bullish on their bonds. In Brazil, the index slid to 21.43 in January from 27.87, the lowest reading of any country. For users in Mexico, the index declined to 34.38 from 41.1. In Japan, the measure climbed to 34.4 from 30.88.

Brazil’s central bank signaled last month it may be ready to lower rates as soon as its next meeting Jan. 21 to bolster the slowing economy. Policy makers led by Central Bank of Brazil President Henrique Meirelles discussed lowering the benchmark Selic lending rate before voting unanimously to keep it at 13.75 percent on Dec. 10.

The European Central Bank slashed its benchmark rate by 175 basis points since October to 2.5 percent, the largest reduction in its 10-year history. The ECB may lower the rate to 2 percent tomorrow, according to the median estimate of 59 economists in a Bloomberg News survey.

The Bank of Japan reduced its overnight lending rate on Dec. 19 to 0.1 percent and offered to buy commercial paper and more government bonds to pump cash into the economy. The bank pledged to explore other measures to ease the credit shortage and counter the deepening global recession.

Government bonds, which tend to perform best when the economy and inflation are slowing, gained 5.6 percent worldwide in the fourth quarter on average after rallying 2.82 percent in the July-to-September period, according to Merrill Lynch’s Global Sovereign Broad Market Index. They have lost 0.41 percent this month.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net