Mon, Nov 19, 2001 page24

• Stakes being raised in US treasuries market

  • BLOOMBERG
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  Andy Brenner, who heads fixed-income sales and trading at Investec Ernst & Co, has been forced to scrap his midday sandwich run.

  The biggest Treasury bond price swings in decades have made that 15-minute trip to Rosario Bistro on Pearl Street a luxury Brenner says he can't afford. Daily price moves almost tripled the last two and a half weeks, magnifying investors' profits and losses, after the Treasury surprised investors on Oct. 31 by announcing it would stop selling 30-year bonds.

  "You can't take your eyes off the screen for two minutes or the 10-year note will jump from 4.8 percent to 4.85 percent," said Brenner, who has started ordering food delivered to his desk. "Things are absolutely nasty out there."

  In the 13 sessions since the Treasury said it would eliminate the 30-year bond sales, the price on the benchmark 10-year note has moved on average US$7.19 per US$1,000 investment a day. That's up from an average US$2.50 daily swing over the previous three months.

  The bigger swings increase the risk for investors in a market seen for decades as the safe other-half of Wall Street's stock market. The 10-year note's 0.7 percent daily price change since Oct. 31 matches that of the Standard & Poor's 500 Index over that time.

  "These massive swings can mean killer profits for some or they can ruin an entire year" for others, said Roseanne Briggen, a Treasury market analyst at the research firm McCarthy Crisanti & Maffei, Inc. "These are tricky times."

  They have been for Bill Gross. The tumble in Treasuries over the last six days wiped out the 2 percent gain posted this quarter by shares of the Pimco Total Return Fund he manages. The fund is the world's largest portfolio of fixed-income securities with US$48.2 billion.

  Investors also drove down the shares of Morgan Stanley Dean Witter & Co and Bear Stearns Cos on concern the securities firms would take losses from the decline in Treasuries. Morgan Stanley fell US$1.65 to US$55.59 and Bear Stearns fell US$1.33 to US$59.02.

  The Treasury's elimination of bond sales triggered the rise in volatility because the decision took investors by surprise.

  Those who had expected the erosion of the budget surplus to force officials to sell more bonds rushed to buy the securities on expectations the government's plan would make them scarce. The price on the most actively traded 30-year bond soared more than 5 points that day, its biggest one-day gain since the 1987 stock market crash. Ten-year notes surged higher too, driving their yield down to a three-year low.

  Two days later, the bond gave back much of those gains, posting its biggest one-day decline since January.

  "Everybody jumped on that trade of buying 10s and 30s, then people booked profits, so we're seeing these big swings," Briggen said.

  Two-year Treasuries have been volatile too. After gaining all year as the Fed cut interest rates, they tumbled this week on expectations signs the economy is close to recovering may prompt policy makers to stop reducing rates. The most widely traded two-year note posted its biggest weekly price decline since at least 1977, driving the yield up 63 basis points to 3.06 percent.

  Victories by US-led forces in Afghanistan contributed to the tumble in Treasuries as investors bet they may bolster consumer confidence, helping fuel the rebound in the economy.

  "We've had an increasing run up in prices, only to have it run down with the ongoing military and political gains," said James Cusser, who manages almost US$1 billion at Waddell & Reed in Overland Park, Kansas.
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