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Posted at 8:33 a.m., Thursday, March 20, 2003

Treasuries Rise as Bush Says War May Be Longer Than Predicted

By Monee Fields-White
Bloomberg News

New York, March 20 (Bloomberg) ­ U.S. Treasuries rose for the first day in four after the U.S. began a second wave of attacks on Iraq in a war that may exceed investors' expectations for a quick resolution.

While benchmark 10-year notes have returned 4.1 percent including reinvested interest since late November, they shed more than 2 percent in value in the past three days alone as investors anticipated a short war would bolster economic growth and stocks.

"People are probably feeling this will be somewhat more protracted than what was priced into the markets," said Michael Mullaney, who manages $10 billion in stocks and bonds at Fiduciary Trust Co. in Boston. "It's still somewhat of a flight to quality."

The 3 7/8 percent note maturing in 2013 gained about 1/8, or $1.25 per $1,000 face amount, to 99 3/16 at 12:30 p.m. in New York, according to Bear Stearns Cos. The yield fell 1 basis point to 3.97 percent. A basis point is 0.01 percentage point.

Mullaney, who has been buying 10-year inflation-indexed Treasuries known as TIPS, said yields on the 10-year notes may fall to 3.80 percent "pretty easily" as investors find a safe place for assets in the event of a drawn-out war.

An artillery attack by U.S. troops was underway at the Iraq- Kuwait border, Fox News reported.

The conflict to disarm Iraqi leader Saddam Hussein "will be a broad and concerted campaign," said President George W. Bush in a televised address last night. The war "could be longer and more difficult than some predict," he said.

'Bullish for Treasuries'

Bush "is hedging his political bet," said Michael McGlone, a government bond analyst at ABN Amro Inc. one of 22 firms that trade with the Federal Reserve. "Reducing those expectations for a quick and easy operation is bullish for Treasuries."

The 1 1/2 percent 2005 note rose about 1/8 to 99 11/16 as its yield fell 5 basis points to 1.66 percent.

Prospects for a long conflict sent the Standard & Poor's 500 Index 0.2 percent lower. Crude oil was up 0.2 percent to $29.95 a barrel on the New York Mercantile Exchange, after reports that Iraqi oil fields were on fire. Between March 10 and yesterday, crude plunged almost 19 percent on speculation a short war would mean limited disruptions to Middle East supplies.

U.S. forces struck Baghdad early today local time with up to 40 cruise missiles, killing one and injuring 14 others, Iraq's ambassador to the United Nations said. Iraqi forces retaliated, firing Scud missiles at Kuwait, Agence France Presse reported.

More than 250,000 U.S. and U.K. troops are in the Persian Gulf region for what the U.S. has dubbed Operation Iraqi Freedom. U.S. officials have little information on whether the bombing raid was successful, White House Spokesman Ari Fleischer said.

"Bomb damage assessment takes time; we don't rush to conclusions," he told reporters. Bush will discuss Iraq with his Cabinet at 2:15 p.m. Washington time, Fleischer said.

'Surprisingly Orderly'

Trading at FTN Financial in New York, a unit of First Tennessee National Corp. has been " surprisingly orderly" since the attacks began, said Chief Economist Chris Low. Traders have likened the war to a "glacier, it's creeping up so slowly that it hasn't had any market impact."

"If we didn't have the television on, we would haven't even known that it had begun," Low cited a trader as saying.

Some traders were surprised more Treasuries didn't change hands during European and Asian trading hours.

"We have a toll-free number connecting our clients all over the world to our offices in Japan, and there was not a single call," said Ronald Purpora, the chief executive officer of Garban Intercapital, a unit of ICAP Plc, the world's largest interdealer brokerage. "My guess is that this war was so publicized that everybody was positioned already."

Gulf War Rally

Bonds surged on Jan. 17, 1991 after the U.S. bombed Iraq at the start of the six-week Gulf War and rallied for a month. They reversed course and from mid-February until mid-June and 10-year notes lost 1.4 percent in value.

A swift end to the current conflict may drive 10-year yields to 4.50 percent in the next couple of months, said McGlone. Fiduciary Trust's Mullaney said he expects yields to range between 4.25 percent and 4.5 percent by yearend.

"The only reason they're at these levels is the war bid," Mullaney said.

Some investors said Treasuries have more room to rise.

"We have two competing forces," the war with Iraq and the weak economy, said Matt Tucker, who helps manage $50 billion in U.S. fixed income at Barclays Global Investors in San Francisco. "Once the war gets resolved, people will turn their attention to the economy, and the economic news hasn't been that good."

Tucker said he's holding fewer Treasuries than his benchmark, the Lehman Brothers Aggregate Index.

Treasuries rose after the Labor Department said new claims for state unemployment benefits exceeded 400,000 for a fifth week, a level that economists say typically indicates U.S. joblessness will rise. The Federal Reserve Bank of Philadelphia's factory index dropped to minus 8 this month, the lowest since December 2001. A negative reading signals more manufacturers surveyed reported business deteriorated than improved.

Corporate Debt

Bonds of Morgan Stanley, Goldman Sachs Group Inc., and Lehman Brothers Holdings gained relative to Treasuries after the securities firms reported higher earnings. Other investment-grade bonds were little changed on average and trading volume was light, some investors said.

"You can't take any real cue from what happened last night," said Mike Dineen, who helps manage $5 billion of bonds at Mony Capital Management. "If you want to make any sort of real observation I think you'll have to wait until next week."

Bloomberg.net with reporting by Terry Flanagan, Mark Tannenbaum and Vivianne Rodrigues in New York. Editor: Wolfson