BLBG: Treasury 10-Year Yields Lowest Since March on Deflation Risk
By Anchalee Worrachate and Wes Goodman
April 13 (Bloomberg) -- Treasury 10-year yields reached the lowest in almost two weeks, as stocks dropped and Pacific Investment Management Co., the biggest investor in U.S. inflation-linked notes, said developed economies face deflation.
The difference between two- and 30-year yields narrowed to 3.66 percentage points from a record 3.85 percentage points in February as investors sought the longest maturities. A slowdown in growth is adding to deflation pressures, Mihir Worah, who runs the $18 billion Pimco Real Return Fund, wrote in a report.
“The decline in stocks provides some support for bonds,” said David Schnautz, a fixed-income strategist at Commerzbank AG in Frankfurt. “The U.S. economy appears to be healing without much evidence of inflation at the moment. That should allow the Federal Reserve to relax a bit.”
The 10-year note yield was little changed at 3.84 percent as of 6:40 a.m. in New York, according to BGCantor Market Data. It earlier slipped to 3.82 percent, the lowest since March 31. The 3.625 percent security due in February 2020 was at 98 7/32.
MSCI’s World Index of shares declined 0.2 percent, snapping a two-day gain, after Alcoa Inc., the largest U.S. aluminum producer, reported lower-than-expected first-quarter sales yesterday.
“There is a near-term risk of flipping to deflation given our view that developed economies have not fully healed and consumers are not yet ready to stand on their own two feet,” Worah wrote on Pimco’s Web site.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 234 basis points from this year’s high of 249 basis points set in January. The five-year average is 215 basis points.
Inflation ‘Years Away’
“Any meaningful inflation should still be a couple of years away,” Worah wrote.
Bill Gross, who runs Pimco’s $220 billion Total Return Fund, says record budget deficits and sales of government debt will eventually push prices in the economy higher.
“Bonds have seen their best days,” Gross said in a March 25 interview with Tom Keene on Bloomberg Radio. Pimco is advising investors to buy the debt of countries such as Germany and Canada that have low deficits and corporate securities with relatively high yields.
Inflation hurts Treasuries because it erodes the value of their fixed payments. Pimco is the largest investor in U.S. TIPS among investors that make regulatory filings, based on data compiled by Bloomberg.
‘Punch Bowl’
The 10-year yield reached its highest level since October 2008 earlier this month, climbing to 4.01 percent on April 5, amid speculation the economic recovery would force policy makers to raise interest rates. Feb Bank of San Francisco President Janet Yellen said March 23 policy makers had to be ready to “take away the punch bowl when it’s necessary.” The target rate for overnight loans has been in the range of zero to 0.25 percent since December 2008.
Treasury 30-year bonds gained yesterday as yields close to the highest level in more than two years attracted investors.
“The 30-year represents the most value on the curve,” said Thomas Tucci, head of U.S. government bond trading in New York at the Royal Bank of Canada, one of the 18 primary dealers required to bid at Treasury auctions. “Whenever the 30-year gets beyond 4.75 percent, insurance companies and pension funds lock in that rate, so that continues to bring in buyers.”
Attractive Yields
Thirty-year yields reached 4.86 percent on April 7, the highest level since Oct. 17, 2007. They were at 4.71 percent today.
Bonds may be attractive at these levels with the outlook for inflation subdued. The Labor Department will say April 14 that consumer prices excluding food and energy rose 1.2 percent in March from a year earlier, the smallest annual increase since February 2004, according to the median estimate of 37 economists in a Bloomberg News survey.
The committee responsible for determining when U.S. recessions begin and end said yesterday that it’s premature to declare an end to the current slump.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
