–‘No Clues’ in Bernanke Speech Amid Hurricane Anxiety

By Yali N’Diaye

WASHINGTON (MNI) – While fiscal challenges remain significant in
the U.S., fixed income portfolio managers see the 10-year U.S. reference
yield trade below 3% until the end of this year as economic growth and
EMU sovereign debt issues continue to remain center stage.

“Short-term, we see a 2% to 2.5% range for the U.S. Treasury
10-year,” Morgan Stanley Smith Barney Chief Fixed Income Strategist
Kevin Flanagan told Market News International Friday.

Earlier this month, he had said he expected the 10-year yield to
trade between 2.5% and 3.5% over the next 12 months, which he still
expects.

“One of the keys here going forward for the 10-year is going to
continue to be the flight to quality, the safe haven status of
Treasuries,” he said.

Economic data are also key and the latest news on that front was
not encouraging and some are already wondering whether hurricane Irene
could push the economy into recession.

On Friday, the Commerce Department reported a 1.0% second quarter
GDP growth, which was — as expected — revised down from a +1.3%
advance estimate.

Federal Reserve Chairman Ben Bernanke also reiterated Friday from
Jackson Hole, Wyoming, that the economic healing would “take a while”
and there may be setbacks. He stressed the need to “remain alert” to the
downside risks to recovery.

Against this backdrop, he said the Fed remains “prepared to employ
its tools as appropriate to promote a stronger economic recovery.”

Bernanke also announced that the September FOMC meeting, initially
a one-day meeting scheduled on September 20, is now going to take place
over two days to include September 21 to allow for “fuller discussion.”

Following his speech at the Kansas City Fed Economic Symposium, the
10-year U.S. yield traded around 2.20% at midday, compared with a close
at 2.22% Thursday at 3:00 pm ET.

“There was nothing in the speech that markets did not know already
and certainly no clues about possible tools to counter-act further
slow-down,” Baring Asset Management Head of Fixed Income and Currency
Alan Wilde told MNI.

“We may glean some insight from August FOMC Minutes and September
FOMC extended by a day to evaluate the range of options may excite
markets,” he added.

“In that context, I still think bonds are rich (and fully priced
for recession) and the dollar cheap and should rally from here,” he
continued.

As a result, he stuck to his expectation of the U.S. 10-year yield
to trading between 2.1% and 2.85% by the end of the year.

“Realistically I think markets will watch data carefully over the
next few months and may hold around current levels until they have
concluded whether a deeper recession (and perhaps the need for more
quantitative easing) or another upswing is more likely,” he reaffirmed.

Given the slow growth and policy rates on hold, AGF Funds Senior
Vice President Jean Charbonneau expects the 10-year Treasury benchmark
yield to trade between 2.0% and 2.50% by the end of the year.

Charbonneau said there is room to rise to 2.50% should economic
data prove stronger.

For BlackRock, a U.S. recession, while possible, is still
“unlikely.”

The investment firm pointed out in a Special Market Update that
despite the weakness of the recent economic data, “It is important to
remember, however, that not all of the data has been negative.”

For HSBC Securities analysts, Bernanke’s speech “endorses a
recovery in the long-term.” They added in a written analysis that “This
view from the Fed Chairman argues that longer term rates should return
to more normal levels over time.”

They concluded that “The speech supports buying dips in the
intermediate sector.”

Credit Suisse Director of U.S. Economics Dana Saporta, Bernanke’s
speech was “The Big Hole at Jackson Hole.” He interpreted the chairman’s
comments as a signal “that additional policy support from the Fed is on
the table.”

That said, “he fell short of listing the policy options available
to the central bank. This was a glaring omission.”

Saporta added in a note that, “We find it hard to imagine the Fed’s
scheduling a two-day meeting and not having some policy response come of
it.”

** Market News International Washington Bureau: 202-371-2121 **

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