BLBG:Treasuries Fall Before Job Data; Fidelity Sees Their Haven Allure Waning
Treasuries fell for a second day, pushing five-year yields up from a record low, before reports today and tomorrow that economists said will show U.S. employment improved in January.
U.S. sovereign debt is lagging behind company bonds this year as the economy shows signs of improvement. Treasuries have returned 0.2 percent, versus 2.2 percent for company debt, according to Bank of America Merrill Lynch indexes. Investor appetite for the safety of top-rated sovereign securities will give way to demand for higher-yielding corporate bonds in 2012 as European officials work to resolve the region’s debt crisis, according to Fidelity Investments.
Benchmark U.S. 10-year yields increased one basis point to 1.84 percent as of 2:55 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 fell 3/32, or 94 cents per $1,000 face amount, to 101 14/32. Five-year notes yielded 0.73 percent, versus the record of 0.6981 set Jan. 31.
“Treasuries are expensive,” said Peter Jolly, head of market research at National Australia Bank Ltd. in Sydney. “While yields can stay low in the near term, they will still end the year higher. There is positive private-sector employment going on. It’s not a rapid rate but there is some momentum.”
High-Yield Demand
Swap spreads narrowed, indicating demand for higher- yielding assets versus sovereign debt. The difference between the five-year swap fixed rate and the yield on similar-maturity Treasuries shrank to a six-month low of 25 basis points. Investors use swaps to exchange fixed and floating interest-rate obligations.
Japan’s 10-year yield dropped one basis point to 0.95 percent.
U.S. employment grew by 145,000 last month after rising 200,000 in December, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report tomorrow. Initial claims for jobless insurance probably fell last week, a separate survey shows before the figure today.
Demand for the haven of U.S. debt during Europe’s fiscal crisis sent Treasuries surging last year. Securities due in 10 years or longer have returned 32 percent in the past 12 months, the most among 144 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies after accounting for currency changes.
European Bond Returns
Irish, Italian, and Belgian bonds are delivering the best returns this year among euro-area debt as a liquidity lifeline from the European Central Bank eases concern that banks will dump their value-impaired government securities.
“There may be continued opportunities in safe-haven assets such as sovereign debt,” Jamie Stuttard, Fidelity’s London- based fixed income portfolio manager, wrote in a report on the company’s website yesterday. “Later in the year, I expect to see increasingly attractive opportunities in corporate bonds throughout the world, including some parts of Europe.”
The Fidelity Global Bond Fund (FIDGLBDA), which Stuttard co-manages, returned 5.3 percent in the past year, beating about half of its peers, according to data compiled by Bloomberg. Boston-based Fidelity oversees $1.52 trillion.
The Federal Reserve is replacing $400 billion of shorter- maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June.
Fed Purchases
The central bank is scheduled to purchase as much as $5 billion of securities maturing from February 2020 to November 2021 today as part of the plan, according to the New York Fed’s website.
Policy makers said Jan. 25 that they will keep their benchmark interest rate at virtually zero until at least the end of 2014, and Chairman Ben S. Bernanke said he’s considering buying bonds to sustain the expansion.
Investors should favor five-year notes among the spectrum of maturities, the so-called yield curve, Ralph Axel, a bond analyst at Bank of America, wrote in a report yesterday.
“The long end of the Treasury curve is more vulnerable, however, due to potential for increased inflation expectations, continued improvement in the tone of economic data and a continued cooling of the European sovereign debt crisis,” Axel wrote.
Wider Spread Forecast
Investors should bet the difference between 5- and 10-year year yields will widen and inflation-protected securities will beat conventional Treasuries, according to Bank of America, one of the 21 primary dealers that trade with the Fed.
The spread between 5- and 10-year rates was 1.11 percentage points, versus the average of 77 basis points over the last decade.
Treasury Inflation Protected Securities have returned 112 percent over the past 10 years, versus 73 percent for conventional U.S. sovereign debt, the Bank of America data show.
The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the debt, matched the average for the past decade at 2.13 percentage points.
Treasuries extended losses from yesterday in New York when industry figures showed manufacturing expanded in January at the fastest pace since June. The Institute for Supply Management said yesterday that its factory index climbed to 54.1 in January from 53.1 in December.
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
