The Wall Street Journal-20080128-Bonds Brace For Another Wild Week

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Bonds Brace For Another Wild Week

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Bond investors should get ready for another bumpy ride in Treasurys this week as stock markets remain unsettled and the Federal Reserve gathers for its rate-setting meeting.

Markets continue to expect another interest-rate cut, although investors have scaled back bets for a half-percentage-point move in the federal-funds target rate to 3% and now see a quarter-point cut as more likely. The week also is laden with data from the durable-goods report to January readings on national manufacturing activity and payrolls.

Investors are split as to where the two-year-note yield, the most sensitive to policy changes, is headed.

"The battle between safety and value will persist," said Chris Sullivan, who oversees $1.3 billion as chief investment officer at the United Nations Federal Credit Union. Mr. Sullivan said the two-year note's rally last week -- which took the yield down to levels not seen since 2004 -- had more to do with risk aversion than with economic fundamentals.

He has shifted out of shorter-dated notes into the five- and 10-year sectors.

The two-year note Friday rose 2/32 point, or 63 cents per $1,000 face value, to 101 31/32, to yield 2.199%, leaving it down 0.144 percentage point on the week. The 10-year note rose 16/32 point, to 105 15/32, to yield 3.582%, down 0.058 percentage point on the week. Yields fall when prices rise.

Wan-Chong Kung, who helps oversee $36 billion in fixed income at FAF Advisors in Minneapolis, said rate cuts combined with the government's stimulus plan will boost growth in the longer term, spelling an end to the two-year note's rally.

Seth Plunkett, a fund manager at American Century Investments in Mountain View, Calif., continues to bet on a steepening yield curve by buying two-year notes and selling their 10-year peers.

The benchmark yield curve, the yield gap between the two- and 10- year notes, late Friday stood at 1.38 percentage points. Mr. Plunkett said he wouldn't be surprised to see the gap widen to two full percentage points this year.