Treasury market loses its 'flight to quality rally'

Bloomberg News Service

NEW YORK — Benchmark 10-year Treasury notes had their biggest weekly drop since December 2001, as the United States and Britain staged a major air attack across Iraq, bolstering speculation the war may end within a month.

Investors shifting to riskier assets drove 10-year yields up 40 basis points since the previous week. The Dow Jones Industrial Average of stocks had its largest advance in more than 20 years.

"Yields could rise a little bit more," said Gary Pollack, who helps manage $10 billion at Deutsche Bank AG's private banking unit. "Given how well the war is going and how strongly the stock market has rebounded, the Treasury market is losing its flight to quality rally."

For the week, the 3 1/2 percent note maturing in 2013 plunged about 3¥, or $32.50 per $1,000 face amount, to 98 5/32 at 5:15 p.m. in New York, according to Cantor Fitzgerald. On the day, it lost 1 3/16 as its yield climbed 15 basis points to 4.10 percent, the highest since Jan. 13. A basis point is 0.01 percentage point.

Pollack, who holds fewer Treasuries than his benchmark, the Lehman Intermediate Government Credit Index, said 10-year yields will rise to 4.25 percent in a month.

"The way things are going, this will end in a month," he said. "Anything longer would go counter to the current euphoria we are seeing" in stocks.

The Dow gained 2.8 percent Friday and 8.4 percent last week, the most since October 1982. The benchmark Standard & Poor's 500 Index rose 2.3 percent Friday and is up 1.8 percent for the year, wiping out losses of as much as 9 percent.

Ten-year Treasury yields surged 54 basis points, and two-year yields climbed 45 basis points since March 10 as expectations of a rapid war increased. An investor who bought $10 million of 10-year notes a week ago at a 3.70 percent yield and sold them Friday at 4.10 percent would have lost $318,300.

Two-year notes declined ahead of a government sale Wednesday of two-year securities.

Many strategists, including Gemma Wright at Barclays Capital Inc. and Mike Cloherty at Credit Suisse First Boston, expect the Treasury to sell $27 billion, matching a record amount of the past 10 auctions.