Treasury 10-year notes snapped a two-day gain as yields near a record low led some investors to seek higher rates outside the government debt market.
Pacific Investment Management Co., which runs the world’s biggest bond fund, said investors should add to their emerging- market holdings. The Fed is scheduled to buy Treasury Inflation Protected Securities due from January 2011 to February 2040 today, according to its website, as part of its efforts to keep benchmark borrowing costs down.
“We like the high-grade and high-yield corporate bond markets,” said Rob da Silva, who helps oversee $212.9 billion in Sydney at Principal Global Investors, part of Principal Financial Group Inc. based in Des Moines, Iowa. “The credit markets offer value.”
The benchmark 10-year note yielded 2.48 percent as of 6:52 a.m. in London, according to data compiled by Bloomberg. The 2.625 percent security due in August 2020 traded at 101 10/32. The rate declined nine basis points, or 0.09 percentage point, over the past two days.
Two-year yields were at 0.36 percent, after falling to a record 0.327 percent on Oct. 12.
The U.S. economy will disappoint investors by expanding at a rate of 1.75 percent over the next year, said Ramin Toloui, an emerging-market portfolio manager at Pimco.
The risks are skewed toward even slower growth, Toloui said on a conference call today. Growth will fall short of the consensus forecast, which is 2.6 percent for the year ahead, according to Pimco.
China Rates
Treasuries advanced yesterday after China unexpectedly increased interest rates, boosting demand for safer assets because of concern the decision will slow one of the engines of global growth.
China’s central bank raised its benchmark one-year lending rate to 5.56 percent from 5.31 percent, and boosted its deposit rate to 2.5 percent from 2.25 percent.
Three Federal Reserve officials reinforced speculation policy makers will boost their Treasury purchases as soon as their next meeting in November, a move investors are calling QE2. Now investors are trying to figure out by how much.
The central bank may keep the purchases to $100 billion a month or less to prevent inflation from picking up, said Hideo Shimomura, who helps oversee the equivalent of $61.4 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank.
‘Done Deal’
“U.S. QE2 is a done deal,” Shimomura said. “Yields will go down.” Mitsubishi UFJ Asset bought Treasuries in September, he said.
Fed purchases will push 10-year yields down to a record 1.75 percent this year, Shimomura said. Morgan Stanley predicted the rate will fall to 2 percent, in an Oct. 18 report from analysts led by Sivan Mahadevan in New York.
The difference between five- and 30-year yields was 2.80 percentage points, near the record of 2.83 percentage points on Oct. 18. The spread has been widening on speculation the Fed will concentrate its purchases on medium-term notes and the stimulus will ultimately result in quicker inflation.
Barclays Capital Inc. recommends investors bet the difference will widen further over the next few days, Ajay Rajadhyaksha, a managing director at the company, and Dean Maki, the chief U.S. economist, wrote in a report yesterday.
Barclays and Morgan Stanley are two of the 18 primary dealers, companies that are authorized to trade directly with the Fed.
Large Scale
Chicago Fed President Charles Evans said yesterday the central bank would need to buy securities on a large scale several times to carry out his preferred strategy of aiming to raise inflation temporarily.
Atlanta Fed President Dennis Lockhart said in a CNBC interview that a pace of $100 billion of purchases a month is “in the range of numbers one might consider.”
William Dudley, New York Fed president and vice chairman of the central bank’s policy-setting Federal Open Market Committee, said his Oct. 1 assertion that officials will probably need to add stimulus “still stands.”
The Fed purchased $300 billion of Treasuries in 2009 under a policy known as quantitative easing, or QE. The central bank announced in August it would reinvest principal payments from its holdings of mortgage debt in Treasuries.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.08 percentage points from this year’s low of 1.47 percentage points set in August. The five- year average is 2.10 percentage points.
Demand for U.S. company bonds has driven the yield on an index of the securities to 2.75 percentage points more than Treasuries, narrowing from this year’s high of 3.25 percentage points in June.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
