Interesting Times

Yields on the benchmark U.S. 10-year note will rise over the next six months, according to the Bloomberg Professional Global Confidence Index. The 5,437 respondents from New York to Tokyo to Paris were optimistic on the outlook for the global economy for a sixth consecutive month, pushing the index, which began in November 2007, to a record high.

Treasury yields will rise for a second consecutive year as U.S. debt sales climb above $2 trillion and the Federal Reserve unwinds stimulus programs, according to the 18 primary dealers that trade with the central bank. The survey shows sentiment is also the most pessimistic on record for the U.K., Spain and Switzerland, where governments also enacted measures to support their economies.

“The market will have to absorb a significantly greater amount of supply as the Fed steps away,” said Michael Pond, a survey participant and an interest-rate strategist in New York at Barclays Plc, one of the primary dealers required to bid on Treasury auctions. “We do expect yields to go higher. Bearishness across all sovereign issuers may be warranted.”

Bond Index

Expectations for an increase in 10-year Treasury note yields rose to 76.65 in January, the highest since Bloomberg began compiling the data in November 2007. The reading was 70.45 in December, and 55.93 a year ago. The measure is a diffusion index, meaning a reading above 50 indicates Bloomberg users expect bonds to decline.

Outstanding public Treasury debt has soared 60 percent to a record $7.27 trillion since the end of 2007 as the U.S. funded two fiscal stimulus programs totaling $955 billion and the $700 billion Troubled Asset Relief Program that bailed out banks. The deficit may be 9.2 percent of gross domestic product this year, according to a survey of economists by Bloomberg. While that is down from 10 percent last year, it’s up from 4.7 percent in 2008.

The Fed is near the end of its $1.75 trillion commitment to support debt markets. The central bank said in November 2008 that it would buy $300 billion of Treasuries and $600 billion of mortgage securities, which it later expanded to $1.45 trillion. It stopped buying Treasuries in October and has acquired $1.12 trillion of mortgages.

Yield Forecast

Yields on 10-year notes will end 2010 at 4.14 percent, the highest level since June 2008, according to a separate Bloomberg News survey. The yield on the benchmark 3.375 percent security due in November 2019 rose 4 basis points to 3.75 percent at 12:31 p.m. in New York, according to BGCantor Market data, after increasing from 2.21 percent at the end of 2008.

The Bloomberg Professional Global Confidence Index rose to 66.6 this month from 58.9 in December. While the outlook for bonds dimmed, sentiment toward the dollar increased for a fourth month, climbing to 53.11 from 51.99 in December. The index is the highest since March. A reading above 50 indicates Bloomberg users expect the dollar to strengthen.

The index covering the yen tumbled to a record low of 35.54 from 50.60. The replacement of Japan’s finance minister four months into the government’s term increases concern about the commitment to rein in budget deficits, Moody’s Investors Service said yesterday.

Sovereign Sentiment

Brazilian, French, German, Japanese, Mexican, Spanish, Swiss and U.K. bond yields will all rise, the Bloomberg user survey showed. A Bank of America Merrill Lynch index measuring returns on government debt shows that the securities lost 1.1 percent in December, the biggest decline since losing 1.53 percent in January 2009.

Speculation about eroding credit quality for European sovereign issuers has pushed yields higher in Greece, Spain and Ireland. The European Commission said yesterday that “severe irregularities” in Greece’s statistical data leave the accuracy of the European Union’s largest deficit in doubt.

Pessimism was the highest for U.K. debt, with the index rising to record 78.17 in January from 72.47 last month.

The Bank of England last week pledged to complete its bond- purchase program as policy makers gauged the strength of the economic recovery.

Improving Economy

Treasuries fell 3.7 percent in 2009 in their worst performance since at least 1978 when Bank of America Corp.’s Merrill Lynch indexes began tracking the debt, compared with a 20 percent gain for corporate bonds, the best since 1995. A year earlier Treasuries rallied 14 percent as investors sought a refuge in government debt as credit markets froze and the recession deepened.

John Lipsky, the first deputy managing director at the International Monetary Fund, said in a Bloomberg Radio interview on Jan. 6 that the agency may raise its 3.1 percent forecast for global growth.

“You’re not seeing the flight to quality that you did before,” said Sean Simko, a survey participant who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. The improving economy will continue to support demand for higher risk assets at the expense of Treasuries, he said.