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Treasuries Gain as Oil Reaches Four-Week High, Stocks Decline

Sept. 20 (Bloomberg) -- U.S. Treasury notes advanced in New York after crude oil rose to a four-week high and benchmark U.S. stock indexes fell.

Demand for fixed-income assets increased on speculation higher energy prices may extend what Federal Reserve Chairman Alan Greenspan last month called a "soft patch" in the economy. Fed policy makers meet tomorrow and are still expected to raise the central bank's target interest rate

"We could be making new highs in oil at a time when we are trying to pull out of a soft spot," said Sadakichi Robbins, head of fixed-income trading in New York at Bank Julius Baer & Co., which has $95 billion in assets. This may be "more ammunition for the bulls to force yields lower."

The 4 1/4 percent note due August 2014 rose 7/16, or $4.38 per $1,000 face amount, to 101 17/32 at 5 p.m. in New York, according to Cantor Fitzgerald LP, a bond broker. Its yield, which moves in the opposite direction of its price, fell 5 basis points, or 0.05 percentage point, to 4.06 percent, matching the lowest since April 2. The yield is down from 4.87 percent in mid- June.

Robbins said the yield on the 10-year note could retest this most recent low in coming days. A sustained break below that level could send the yield to 4 percent, he said.

Some traders bought back Treasuries they had borrowed and sold on expectations prices would fall before the central bank meets tomorrow, said Scott Gewirtz, co-head of Treasury trading at Deutsche Bank Securities Inc. in New York. Traders who are "short" sell borrowed securities on expectations they will make a profit by buying them back later at a lower price.

Deutsche Bank is one of the 22 primary U.S. government securities dealers that trade with the Fed's New York branch.

Snow on Global Growth

Treasuries extended gains after U.S. Treasury Secretary John Snow said the global economy is "still growing too slowly," particularly the 12 nations using the euro. He recommended flexible exchange rates as a way for growth to accelerate, urging China and other countries with fixed currency rates to move away from them.

Crude oil for October delivery jumped 1.7 percent to $46.35 a barrel, the highest since Aug. 20, on the New York Mercantile Exchange. The Standard & Poor's 500 Index fell 0.6 percent, trimming its gain to less than 1 percent this year.

Resurgent oil "is the worst thing to happen for the Fed" because it leads people to wonder whether raising rates is the right thing to do, said Michael Franzese, head of U.S. Treasury trading at Zions First National Bank in Jersey City, New Jersey.

'Very Unusual'

Treasuries rose even as a Bloomberg News survey of economists indicated the Fed tomorrow will raise its interest- rate target for overnight bank loans a third time this year and signal that another increase is likely before the end of December. Policy makers will lift the so-called federal funds target a quarter of a percentage point to 1.75 percent, according to the median estimate of 86 economists in the survey.

Should the Fed's policy statement tomorrow show "any hint that they're done for the year, we will break 4 percent immediately" on the 10-year yield, said Michael Cheah, who manages $2 billion of bonds at AIG SunAmerica Funds in Jersey City, New Jersey. "That would send a shock wave" through the Treasury market.

Three-Month Rally

Treasuries began to rally June 15, when the Labor Department said consumer prices in May rose less expected. Gains accelerated as job growth slowed in June and July and energy prices surged. Greenspan last week said "innumerable areas" of the economy "are doing poorly."

At 2.21 percent, the yield on the December Eurodollar futures contract suggests that traders expect the central bank moving its target toward 2 percent in early 2005. The contract settles to a three-month lending rate that exceeded the Fed's target by an average 22 basis points in the past 10 years.

The Fed tomorrow may drop its stated commitment to raise rates at a "measured" pace because "in today's low-inflation, moderate-growth environment, that language could be removed without creating any concern" the Fed will raise rates in half- percentage point increments, said Lou Crandall, chief economist at Wrightson ICAP LLC of Jersey City, New Jersey, said.

The 2 3/8 percent note, which is more sensitive to changes in expectations for monetary policy than the 10-year note, rose about 1/8 to 99 29/32. Its yield fell 5 basis points to 2.42 percent.


Ried, Thunberg & Co.'s index on the outlook for the 10-year note was unchanged at 41 last week. A reading below 50 suggests investors expect the note's price to drop by year-end. The 40 international investors polled by the Jersey City, New Jersey- based research firm manage $1.24 trillion.

Investors surveyed cut the percentage of U.S. government debt held in their portfolios to 29 percent, the lowest in five weeks, according to Ried Thunberg.

Goldman Sachs Group Inc., the third-largest securities firm, reduced its forecast for global economic growth next year on expectations the expansion will weaken in regions including Europe. Goldman now sees 2005 growth in the global economy of 3.8 percent to 3.9 percent, down from an earlier forecast of 4.1 percent. The firm predicts 4.9 percent growth for this year.

"Just because the Fed is going to raise rates tomorrow doesn't mean it's time" to bet against Treasuries, said Peter McTeague, co-head of interest-rate strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, another primary dealer. "The market has good technical and fundamental underpinnings, from very transitory inflation to more moderate growth relative to where it was at the beginning of the year."

McTeague was ranked the top U.S. government debt strategist last year in an Institutional Investor magazine poll.

Yield Gap

The gap between two- and 10-year Treasury note yields is 1.643 percentage points, matching the smallest since September 2001 and suggesting investors expect inflation to remain under control. The difference was 2.48 percentage points in January.

The difference in the number of wagers by hedge funds and other large speculators on a gain in the 10-year note compared with those on a decline -- so-called net longs -- numbered 640 contracts, figures reflecting Tuesday's holdings at the Chicago Board of Trade show. The prior week, there was a net-short position of 50,380 contracts, and bets on a decline outnumbered bets on a gain for the previous 28 weeks.




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