BLBG:Treasuries Hold Decline as Economists Predict U.S. Job Market Is Improving Q
Treasuries held a decline from yesterday before government reports today and tomorrow that economists said will show U.S. employment improved in January, reducing demand for the safest securities.
U.S. sovereign debt is lagging behind company bonds this year as the world’s biggest 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 bonds will give way to demand for higher-yielding corporate debt in 2012 as European officials work to resolve the region’s debt crisis, according to Fidelity Investments.
“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.”
The U.S. 10-year yield was little changed at 1.83 percent at 8:59 a.m. in London after rising three basis points yesterday, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 traded at 101 17/32.
Swap spreads narrowed, indicating demand for higher-yield assets versus sovereign debt. The difference between the five- year swap fixed rate and the yield on similar-dated Treasuries shrank to a six-month low of 25 basis points. Investors use swaps to exchange fixed and floating interest-rate obligations.
Job Growth
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 Bloomberg survey showed 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.
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.
‘Increasingly Attractive’
“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.
The central bank is scheduled to buy as much as $5 billion of securities due from February 2020 to November 2021 today as part of the plan, according to the New York Fed’s website.
Fed Rates
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 different maturities in 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.
Investors should bet the difference between five- 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 five- and 10-year rates was 1.11 percentage points, versus the average of 77 basis points over the last decade.
Inflation Outlook
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.
The five-year, five-year forward breakeven rate, which projects the pace of price increases starting in 2017, rose to 2.48 percent from 2.38 percent at the end of last year. The rate is a measure of inflation expectations that the Fed uses to help determine monetary policy.
Treasuries fell yesterday in New York when industry figures showed manufacturing expanded in January at the fastest since June. The Institute for Supply Management said yesterday 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: Daniel Tilles at dtilles@bloomberg.net
