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A further Bloomberg story on Tbonds, Bill Gross
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Subject: (BN ) U.S. Bond Market Is Roiled by Bets on Higher Rates (U
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U.S. Bond Market Is Roiled by Bets on Higher Rates (Update2)
2/4/0 7:40 (New York)
(Updates 7th paragraph with comment from firms.)
New York, Feb. 3 (Bloomberg) -- Wall Street's biggest bond
traders kicked off 2000 with a $67 billion bet against Treasury
bonds rising.
So far, the wager has proved costly.
Anticipating the Federal Reserve would continue to raise
interest rates to slow the economy, the 30 primary dealers that
trade with the Fed had by Jan. 5 sold $67 billion of borrowed
bonds, a bet prices would fall and they would be able to buy them
back cheaper.
Treasury Under-Secretary Gary Gensler's announcement
yesterday that the government would reduce sales of debt, as well
as buy back securities due in 10 years or more, prompted a
scramble for bonds, producing the biggest two-day rally in bonds
since the October 1987 stock market crash.
``People had taken too much pain and they were unwinding
whatever positions they were in,'' said Martin Mitchell, manager
of government trading at Legg Mason Wood Walker in Baltimore.
The surge also set off a rash of speculation that banks or
hedge funds unable to buy back bonds they had sold were suffering
losses and would need to be rescued. That prompted more buying.
A trader at Goldman Sachs Group Inc. said Deutsche Bank AG
had suffered big losses. A trader at Credit Suisse First Boston
Inc. claimed Salomon Smith Barney Inc. lost a bundle. A trader at
Deutsche said Goldman and Merrill Lynch & Co. were in trouble
because of the sudden increase in bond prices. Officials at the
firms said they suffered no major losses.
The Fed took the unusual step of calling news organizations
to squash talk it was meeting to bail out a hedge fund or a bank.
That revived the specter of Long-Term Capital Management, a fund
that collapsed in September 1998, triggering a rush into the
safety of Treasury bonds and prompting the Fed to organize a
bailout.
``Normally the New York Fed does not respond to market
rumors, however, we would like to confirm that rumors of a meeting
of market participants at the bank are completely unfounded,''
said Doug Tillett, a spokesman for the bank.
Bad Bet on Mortgages
The benchmark 30-year bond rose 1 30/32 to a price of 99
26/32, causing its yield to plunge 14 basis points to 6.14
percent. Since the current rally began Jan. 21, the 30-year bond
has returned 8.4 percent, including reinvested interest.
``There is a growing realization that we are serious about
paying off the debt,'' said a senior Treasury official.
While the gain has been spurred by investors snapping up
Treasury bonds because they expected them to become scarce, it was
accelerated by traders swapping out of unprofitable mortgage
securities.
Mortgages were expected to do well this year as the Fed
raised rates because higher rates would translate into few bonds
sold and slower prepayments, said Jim Shallcross, a portfolio
manager at Independence Fixed-income Associates in McLean,
Virginia.
``Generally people think that during stable and higher
interest rates mortgages will outperform'' Treasuries, said Phil
Barach, who manages $20 billion in bonds at TCW Group Inc. in Los
Angeles.
The primary dealers reported to the Fed that they owned $26
billion of agency and mortgage-backed securities at the beginning
of the year. Those fixed-rate mortgage securities have lost 0.67
percent this year, compared with a 0.66 percent gain for
Treasuries, according to Lehman Brothers Inc. indexes.
As investors became convinced that the Treasury would reduce
the amount of debt outstanding, investors unwound the bets against
bonds they'd made, said Joseph Pregiato, co-head of fixed-income
sales at Josephthal & Co.
``The only thing you can say for sure is that the movement in
the marketplace suggests that people are having some forced
liquidation,'' said Van R. Hoisington, president of Hoisington
Investment Management Co. in Austin, Texas, a fixed-income money
manager of about $4 billion.
Bill Gross Weighs In
Michael Hoeh, who manages $5.5 billion in bonds at Dreyfus
Corp., said also contributing to the pessimism about mortgages and
the optimisim about Treasuries were comments that Bill Gross, head
of Pimco Advisors Holdings LP, the world's largest fixed-income
manager posted on the firm's Web site.
``Bill Gross put his thoughts on his Web site about fixed-
income markets and there were indications he was more bullish on
Treasuries and less bullish about spread product such as
mortgages,'' Hoeh said.
Gross told the L.A. Times that Pimco was ``partly
responsible'' for the spark that prompted the surge in prices by
beginning to by Treasury bonds about a month ago while he was
selling mortgage securities and other shorter-term notes.
One indication investors are concerned about losing more
money in mortgages is the widening of swap spreads, one measure of
the cost of financing purchases of fixed-income securities. Ten-
year swap spreads traded as high as 100 today and finished at 90,
up from as low as 70 a week ago, traders said.
Nicholas Walsh, who helps invest $10 billion in fixed-income
asset at J. & W. Seligman & Co., was among the investors who bet
on mortgages last year, increasing his holdings of mortgages at
the end of last year to 25 percent of his portfolio up from about
20 percent, selling corporate bonds and Treasuries.
So far, Walsh isn't selling the mortgage-backed securities,
betting on a rebound. ``Once this volatility recedes in the
Treasury market, mortgages can rally,'' said Walsh.
-- Ted Merz in the New York newsroom with reporting by Jonas
Bergman, Beth Williams, MaryAnn Busso, Monique Wise, Vernon Silver
and Kathy O'Donnell in the New York newsroom (212) 893-3037 and
Katherine M. Reynolds in Washington (202) 624-1934/tm/fk
Story illustration: To graph the yield on 30-year U.S. bonds: GT30
<Govt> GY
<Go>
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-0- (BN ) Feb/04/2000 7:40
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