Tags: treasury | bonds

Treasury Bonds: No Summer Rally

Tuesday, 07 Jul 2009 03:29 PM

By Dan Weil

U.S. Treasury bond prices normally increase in the summer, but that’s unlikely this year thanks to the exploding budget deficit.

That deficit requires the Treasury to sell a slew of bonds, pushing their prices down and yields up.

The yield on 10-year Treasurys dropped by an average of 35 basis points between June and September in 15 of the last 20 years, Bloomberg reported.

The last year yields rose was 2005, to the tune of 34 basis points, as the Federal Reserve lifted interest rates. This year, yields probably will climb again.

The Treasury already increased its note and bond issuance by more than 100 percent, to $963 billion, in the first half of the year.

And the Treasury might sell another $1.1 trillion of Treasurys by year-end, according to Barclays Plc, one of the 16 primary dealers that bid at Treasury auctions. That amount would eclipse the total issuance for 2008.

The money raised will finance the budget deficit, estimated at a record $1.8 trillion for this year.

“I used to be a believer” in the summer rally, Gary Pollack, head of bond trading at Deutsche Bank Private Wealth Management in New York, told Bloomberg. “The amount of Treasury debt that needs to be financed is a game-changer.”

He’s not the only Treasury bond bear.

“Avoid Treasurys, that’s my advice,” Donald Quigley, co-manager of Artio Total Return Bond fund, told The Wall Street Journal.

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