Dollar, Bonds to Fall on Recovery Signs, Survey Says

(Bloomberg) -- Investors worldwide predict that government bond prices and the U.S. dollar will weaken as demand for better-yielding assets increases amid rising confidence in the global economy, a survey of Bloomberg users shows. Participants forecast higher long-term bond yields over the next six months as investors sell Treasuries in favor of German, Brazilian and Japanese stocks and oil and copper, according to 2,410 respondents from New York to Tokyo to London in the Bloomberg Professional Global Confidence Index.“Investors have an appetite for risk that was not there a couple of months ago,” said Christopher Low, chief economist at FTN Financial in New York, who participated in the survey. “It all starts with recovery.”
The index of expectations for long-term Treasury yields rose to 73.71, the most since Bloomberg began conducting the survey in December 2007, from 67.2 in April. A reading above 50 in the so-called diffusion index indicates participants are bearish on Treasury prices and expect yields to rise.Treasuries are suffering their biggest losses since at least 1978, when Merrill Lynch & Co. indexes began tracking their performance, as the U.S. government issues more debt and investors become increasingly concerned that inflation will return. Government debt has lost 6.2 percent since December, following a 14 percent gain in 2008 as investors sought refuge from losses tied to subprime mortgages, according to Merrill Lynch’s U.S. Treasury Master index.

Treasury Yields
Yields on 10-year notes rose to a seven-month high of 3.92 percent today, the highest since Nov. 4, from 2.21 percent at the start of the year. The 30-year Treasury yield increased to 4.73 percent, the highest in a year. The government will sell a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of the 16 primary dealers that trade with the Federal Reserve and are required to bid on Treasury auctions.Survey participants almost set records for bearish bond sentiment in the U.K., which rose to 75.36 from 65.59, in Italy which increased to 71.88 from 58.82, and in France, which climbed to 65.98 from 55.86.The biggest shift was in Mexico, where expectations for long-term bond prices to gain vanished, with the index increasing to 52.6 from 32.11.

‘Asset Allocation’
“We’re not calling for more bank failures or even lower GDP,” said Suvrat Prakash, an interest-rate strategist in New York and survey participant at BNP Paribas Securities Corp., a primary Treasury dealer. “If you think things can’t get worse, it might not be such a bad idea to buy the stock market. There’s bound to be some asset allocation” out of government bonds, Prakash said. The survey’s index for expectations on the U.S. dollar fell by the most since March 2008 to 31.61, the lowest since then. The dollar has fallen against 11 of the 16 most traded currencies this year, data compiled by Bloomberg show. “Dollar weakness prevailed before the breakout of the credit crisis,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, who participated in the survey. “That trend is going to re-emerge.”Confidence in the global economy rose to 43.57, the highest since the poll began, from 38.72 in May.

Unemployment
Sentiment is picking up as job losses in the U.S. grew by the smallest amount since September last month. Payrolls fell by 345,000, after a 504,000 loss in March, even as the unemployment rate increased to 9.4 percent, the highest level since 1983, the Labor Department said June 5. The National Association of Retailers said June 2 that the number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, more than forecast and the fourth increase in five months.
Increased risk appetite also pushed up sentiment for the Brazilian real to 78.63 from 64.95, the highest since November 2007. French participants were the most bullish ever on the euro, to 71.31 from 53.79. Brazil’s Bovespa Stock Index has soared 45 percent since the end of March while the CAC 40 Index in France has rallied 30 percent before today.After financial institutions worldwide recorded credit losses of $1.47 trillion since 2007, the Standard & Poor’s 500 index of U.S. stocks has rallied 39 percent to 942.43 yesterday from its March 9 low of 676.53. It’s still down 40 percent from its October 2007 high of 1,576.09.

Beefed Up
Sentiment has improved after global governments and central banks beefed up efforts to combat the worst economic crisis since the Great Depression. The European Central Bank joined policy makers at the Fed, the Bank of England and the Bank of Japan in saying it will buy debt securities. The Fed’s decision to print money to buy $153 billion of government debt and $532.9 billion of mortgage securities as it tried to push down consumer borrowing costs and China’s Treasury purchases also are contributing to pessimism about bond prices. “You have the economic optimism that’s pushing people to think that yields could be higher on the long end, you’ve got the inflationary policies, the threat that China could be dumping Treasuries on the long-end,” BNP’s Prakash said.