Bond Trading Idea Using Primary Dealers Prediction

On Jan. 2, 2007, "Wall Street's biggest bond-trading firms, confident the Federal Reserve will lower interest rates as the U.S. economy cools, say Treasuries will post the best gains in five years during 2007." reported Bloomberg News.

Primary dealers predicted the biggest bull market for Treasuries since 2002 at the start of this year. In a Bloomberg survey in January, the firms forecast gains of 5.4 percent in 10-year notes and 5.1 percent for two-year securities.

Following are the results of Bloomberg's survey, conducted from Dec. 18, 2006 to Dec. 28, 2006:
.................................................2-year......... 10-year

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Then (End of 2006)....................... 4.8%........ 4.62%

Median* ........................................4.5%....... 4.55%

Current (Nov.26, 07) .................... 3.135%... 4.042%

* Median forecasts in a Bloomberg News survey of the 22 primary government security dealers for Q4, 2007.

Now is November 26, 2007 and Treasuries are poised to post higher returns than corporate debt and the S&P 500 for the first time since 2002 as the primary dealers predicted. Treasuries of all maturities have gained 8.6 percent this year, compared with 3.9 percent for company debt, according to Merrill Indexes (See the right-hand side charts). The S&P 500 paid 3.3 percent, including dividends, Bloomberg data show. Indeed, the returns on Treasuries may exceed even primary dealers' forcasted returns as indicated in the U.S. Government Indices (as shown in the left-hand side table) as the yields fall by more than their expectation.

Will a primary dealers prediction be a good indicator for trading Treasuries for the coming years?