Goldman Says U.S. 10-Year Yields May Approach 5-Month Low of 3%
By Candice Zachariahs

Sept. 16 (Bloomberg) — Yields on 10-year Treasury notes “risk” a decline toward 3 percent, the least in five months, as the underlying inflation rate is likely to set new lows, Goldman Sachs Group Inc. said.

The U.S., the U.K. and Australia will be the “main beneficiaries” of a rally in longer-maturity government bonds, Francesco Garzarelli, chief interest-rate strategist in London at Goldman Sachs, wrote in a research report. Australian 10-year securities are the “cheapest” among markets tracked by Goldman and should trade at yields below 5 percent, he wrote.

“We see risk skewed in the direction of 10-year yields breaking towards their 200-day moving average of 3 percent, from their current 3.4 percent level,” Garzarelli and Michael Vaknin wrote in a separate note to clients. “The global bond premium remains elevated, although off the June highs, and there is plenty of excess liquidity in banks balance sheets which needs to be put to work.”

The yield on the U.S. 10-year note declined one basis point, or 0.01 percentage point, to 3.45 percent at 11:05 a.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 rose 1/32, or 31 cents per $1,000 face amount, to 101 14/32.

The yield on 10-year Australian government bonds rose four basis points to 5.30 percent, according to data compiled by Bloomberg.

Cost of Living

The cost of living in the U.S. probably rose 0.3 percent in August, Labor Department data will likely show today according to the median estimate of 75 economists surveyed by Bloomberg News. Investors use the figures to gauge inflation, which eats away at a bond’s returns. Goldman Sachs expects the consumer price index to rise 0.2 percent.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, stood at 1.85 percentage points, compared with an average of 2.19 points over the past five years.

Investors may benefit by using a so-called “call spread” in the futures market to bet on gains in Treasuries, the bank said. Goldman advised purchasing an option to buy a 10-year future at a strike price of 118, implying a yield of 3 percent, while simultaneously writing a buy option on the same future with a strike price corresponding to a yield of about 3.3 percent.

The trade offers protection “against the risk of a sharper bounce in risky assets,” the analysts wrote.

Federal Reserve Chairman Ben S. Bernanke said in Washington yesterday that the worst U.S. recession since the 1930s probably ended, while adding that growth may not be strong enough to quickly reduce the unemployment rate.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

Last Updated: September 15, 2009 22:07 EDT

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