Time to Sell Treasuries, Biggest Korean Fund Says

LONDON, Jan 19 (Reuters) – The price investors pay to insure themselves against the U.S. government defaulting on its debt jumped to a record high on Monday, according to data provider CMA DataVision. Source: Reuters

Jan. 19 (Bloomberg) — A rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.

U.S. government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14 percent last year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as investors sought the relative safety of debt.

“It’s time to sell U.S. Treasuries,” said Kim, who took over as head of investments at the start of the year. “The stimulus plan may cause inflation. The U.S. will raise the benchmark interest rate.”

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U.S. government securities headed for their first monthly loss since October after President-elect Barack Obama, who takes office tomorrow, said he will do “whatever it takes” to battle what he called the biggest economic crisis since the Great Depression. Obama is planning an $850 billion stimulus plan, on top of $700 billion approved by President George W. Bush.

Ten-year Treasury yields, used as benchmarks for corporate and government borrowing costs, will rise to 3.08 percent by year-end from 2.32 percent now, a Bloomberg survey of banks and securities companies shows. An investor who bought today would lose 3.3 percent including reinvested interest if the forecast proves accurate, according to data compiled by Bloomberg.

Two-year rates will climb to 1.43 percent from 0.73 percent, according to the survey, which gives heavier weightings to the most recent forecasts.

Higher Rates

The Fed will increase its target rate for overnight loans between banks to 0.75 percent by March 31, 2010, the poll shows. The U.S. central bank last month cut the target to a range of zero percent to 0.25 percent.

U.S. yields indicate traders are becoming more concerned about inflation.

The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, widened to 53 basis points from minus 8 basis points two months ago.

The spread has averaged 1.19 percentage points during the past six months.

Cutting Holdings

Investors in South Korea cut their holdings of U.S. debt to $28.6 billion in November, less than half of what they owned in 2006, based on Treasury Department data.

China, the largest foreign owner of Treasuries, increased its stake to a record $681.9 billion in November.

It may take a few months for the U.S. economy to start growing and Treasuries to fall, Kim said. Government debt has handed investors a 0.4 percent loss so far in January, according to the Merrill index.

The economy will shrink in the first half of 2009 and expand in the second, a Bloomberg survey of banks and securities companies shows.

“At the end of this year, Treasury prices will depreciate,” he said. “We are considering” selling.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: January 19, 2009 04:00 EST
By Wes Goodman

Source: Blooomberg

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