Wall Street dumps most Treasuries since 2004

Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004 as the world’s biggest bond firms bet that the economy will strengthen and demand for higher-yielding assets will increase.

The 18 primary dealers that trade with the Federal Reserve reported that holdings of US government debt tumbled to a net $2.34 billion on December 29 from $81.3 billion on November 24, the most since June 2009, according to the most recent central bank data. While the stake is the lowest since February, corporate bond and mortgage securities have risen from the lows of the year.

Dealers had stocked up on US debt anticipating demand from customers who wanted to sell the securities to the central bank as part of Fed Chairman Ben S Bernanke’s plan to buy $600 billion of Treasuries. Government bonds lost their allure as stocks rose, corporate financing conditions eased, expectations for inflation increased and the dollar strengthened.

“Slowly but surely the economy’s getting on stronger footing,” said John Fath, who helps manage $2.5 billion as a principal at investment firm BTG Pactual in New York and was the former head government-bond trader at UBS Securities LLC, a primary dealer. “There are people moving or thinking of moving out of risk-free assets. This is what Bernanke wanted.”

Berkshire Hathaway Inc, the Omaha, Nebraska-based holding company controlled by billionaire Warren Buffett, and General Electric Co’s finance unit led companies selling a record $48.5 billion of bonds in the US last week as relative yields on investment-grade debt shrank to the narrowest since May.

Growth prospects
Dealers typically pare Treasuries holdings as company debt sales accelerate, according to Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $22 billion. This represents “the normal functioning of the market,” he said.

Prospects for faster economic growth caused Treasuries to lose 2.67 per cent last quarter, including reinvested interest, trimming the annual gain to 5.88 per cent for 2010, Bank of America Merrill Lynch’s US Treasury Master index shows. Company bonds lost 0.57 per cent in the three months ended December 31, cutting their annual gain to 10.8 per cent.

Yields on 10-year Treasuries, which serve as a benchmark on everything from corporate loans to mortgages, rose 3 basis points to 3.32 per cent last week. Primary dealers forecast the yield will climb to 3.65 per cent by the end of the fourth quarter, a Bloomberg News survey last month showed. Yields dropped as low as 2.33 per cent on October 8. Yields were little changed at 3.32 per cent at 7:26 am in New York.

‘Tone has shifted’
While rising, 10-year yields remain below their average of 5.43 per cent since 1990 even though the US is running a budget deficit that exceeds $1 trillion, or more than 8 per cent of the economy. The last time the US had a surplus, from 1998 through 2001, yields averaged 5.45 per cent.

“You’re not going to see a repeat of the low yields that we’ve seen in the last six months,” said Sean Simko, who oversees $8 billion as a managing director at SEI Investments Co in Oaks, Pennsylvania.