New York market: Signs indicate that bonds are poised to fall

Dow Jones
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DAVID MOZINA says investors who want to know where Treasury bonds are headed should watch what's happening to a currency half a world away - in Australia. If the strategist at Merrill Lynch is right, US bonds are poised to fall.

Mr Mozina says the currency and US 10-year yields have run a parallel course 79 per cent of the time since 1990. What's more, his research shows the Australian dollar leads Treasuries by three to six months, which gives investors plenty of time to plot their next move. "It's one of the better indicators for Treasuries," he said.

The Australian dollar has rallied 7 per cent against the US currency so far this year, reflecting expectations that stronger global growth will boost prices for the commodities it exports. Higher commodity prices fuel inflation, which in turn drives US bond yields higher.

Australia's trade relationship with emerging-market economies also makes its currency a gauge of the risk global investors will tolerate. The more risk they'll take, the less they need the safety of US government securities.

With US yields climbing, investors who bought 10-year notes at the start of the year have lost 6 per cent. And if Mr Mozina is right, they could be set for another round of declines as the Aussie dollar extends its gains, as many expect.

Traditional economic indicators, including employment cost and labour statistics also point to Treasury losses.

Next week's employment report will contain some important clues. Economists expect US unemployment in June probably held near its lowest in three decades, at 4.3 per cent, while earnings rose 0.3 per cent from 0.4 per cent in May. Investors will watch the economic signposts leading up to the 24 August meeting of the Fed. This week, purchasing managers and jobs growth. Next week, retail sales and producer prices. Following week, consumer prices.

Stocks fell last week because investors are less willing to pay high price-earnings multiples as interest rates rise. That's particularly true of companies for which expectations are highest, such as computers and internet businesses. Last week, the S&P 500 Index lost 2.1 per cent, the Dow Jones Industrial Average declined 2.3 per cent and the Nasdaq fell 2 per cent. For the month of July, the S&P fell 3.1 per cent, the Dow fell 2.8 per cent and the Nasdaq slipped 1.8 per cent.