The Wall Street Journal-20080204-Yield Rise Seen for Longer Treasurys- Bonds of 10- 30 Years May Buck a Trend- Some Strategists Say

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Yield Rise Seen for Longer Treasurys; Bonds of 10, 30 Years May Buck a Trend, Some Strategists Say

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Bucking a trend of broadly lower Treasury yields, some Treasury-bond strategists are forecasting that yields in the 10-year and 30-year sectors will rise between this month and May in what they described as a bearish seasonal pattern.

Several forces are at play. Japanese investors, the largest foreign holders of Treasurys, tend to sell bond holdings as they repatriate funds ahead of the close of their fiscal year in March.

Supply factors also kick in. The government tends to have hefty borrowing needs in the first quarter to plug the gap until tax receipts start flowing in April. Already this week, the Treasury is slated to sell $13 billion in 10-year notes and $9 billion in 30-year bonds.

Aggressive interest-rate cuts by the Federal Reserve, coupled with the government's economic-stimulus plan, may fuel concern over inflation. Adding to price pressures are elevated oil and gold prices and a falling dollar.

Unlike the two-year note, which reacts more to changes in central- bank policies, the 10-year and 30-year sectors are more sensitive to inflation concerns. A rise in the 10-year yield will further widen its gap with that on the two-year note, further steepening the so-called benchmark yield curve. The gap reached 1.51 percentage points Friday, the widest since October 2004.

"The setup for the bear seasonal [period] is as good as we have ever seen because of the structure of rates and the fact that everybody is crowded into Treasury securities from all other asset classes," said William O'Donnell, head of U.S. government-bond strategy at UBS Securities LLC in Stamford, Conn.

"The yield on the 30-year bond [Friday] only traded at [0.2 percentage point] away from the lifetime low" of 4.1% set on Jan. 23, he said. "If you look for the bear seasonal to work, you expect to see it when we are in a period of higher prices in bond markets, or lower yields."

In a recent report, Mr. O'Donnell identified the period from Feb. 9 to May 10 as the bear seasonal period. Crunching data for the past 20 years, he found that the 10-year yield on average climbs 0.355 percentage point during this period.

By the end of the second quarter, he expects the 10-year yield, 3.598% on Friday, to have risen to 4.5%, while the 30-year yield will have increased to 5%, from 4.316% Friday.

Others snubbed the idea. "I really don't pay a lot of attention to that. It is like telling me the stock markets are always up in January. Yes, except for this year," said David Rosenberg, chief North American economist at New York-based Merrill Lynch & Co. "I pay more attention to the fundamentals, and the fundamentals are telling us that the trend is still for lower rates in Treasurys markets."

He said the U.S. economy has transitioned into the early stage of a recession, and the Fed will keep cutting borrowing costs, eventually bringing the federal-funds rate down to 1% over the next 12 to 18 months. Bond yields will grind lower, and by January next year, the 10-year yield may retest and even fall below 3.07%, the lowest point in at least four decades.

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Liz Rappaport contributed to this article.