4 Min Read
* Treasuries prices gain on benign inflation, outlook
* Rates seen likely to rally on slowing growth
* Dealers, fund managers significantly short Treasuries
* End of QE could spark short squeeze, send rates lower (Adds comments, updates prices, recasts throughout)
By Karen Brettell
NEW YORK, April 15 (Reuters) - Analysts and traders are turning increasingly bullish on the near term outlook for U.S. Treasuries, saying slowing growth and still benign inflation may help the debt bloom this Spring.
U.S. government debt was boosted on Friday after data showed underlying U.S. inflation pressures remained subdued and consumers adopted a more restrained inflation outlook in April.
Gains are seen likely to continue as investors adjust to recent data showing the economy growing at a slower pace, which may make the Federal Reserve slower to raise interest rates than bonds are currently pricing for.
"We now believe it's time to start buying bonds again ahead of the debt ceiling and end of QE2 discussions," said George Goncalves, head of rates strategy at Nomura Securities International in New York.
Benchmark 10-year note yields could drop another 25 basis points as investors adjust to declining economic growth expectations, he said.
The notes' yields US10YT=RR were down 7 basis points on Friday to 3.43 percent.
And, "we believe...the end of QE2 would simply push buyers out of risk assets and back into Treasuries," he said. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
To see a graph on CPI and inflation expectations go to r.reuters.com/dyp98r and to see foreign Treasury holdings click on r.reuters.com/xap98r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
END TO FED BUYING GOOD FOR BONDS?
Some investors including PIMCO's Bill Gross have warned the end of the Fed's $600 billion bond purchase program in June could spark a massive selloff of bonds as it may be difficult to find enough other buyers to replace the Fed.
Several analysts, however, see these fears as overstated.
Credit Suisse's Carl Lantz predicts the Fed's exit from the market could instead provoke a technically-led squeeze on the debt that sends rates lower.
"Our base case is that rates will tend to rally around the end of the program as disappointed shorts are "squeezed" into the market," Lantz said.
Ten-year note yields have risen a full percentage point since the Fed announced QE2 on Nov. 3, when they traded at around 2.50 percent.
A dramatic yield rise immediately following the announcement was blamed in part on investors being in a crowded, and ultimately wrong, bet that that rates would later rally.
Dealers are now holding the largest net short Treasury position since 2008, at nearly $50 billion, and the largest positions is in debt maturing in 6-to-11 years, which is the area the Fed has targeted most of its purchases, Lantz said.
Fund managers are also substantially short the debt relative to their benchmarks.
"History seems to be repeating itself, but in reverse, with real money moving to a massive short position as the end of QE approaches," Lantz said. "This leads us to suspect that the most likely outcome at the end of QE will be a move to lower rates."