BLBG:Treasuries Lag Behind Company Bonds as U.S. Economic Data Points to Growth
Treasuries, little changed today, are lagging behind corporate bonds as economists said an industry report today will show an index of U.S. leading indicators rose for a fourth month.
Ten-year yields that are within 33 basis points of a record low are losing their attraction among some investors as the American economy improves. U.S. government securities have handed investors a 0.5 percent loss this year, based on Bank of America Merrill Lynch indexes. Corporate bonds in the U.S. gained 2.3 percent, the figures show. BlackRock Inc., the world’s biggest money manager, is recommending company debt.
“Treasury yields are not satisfactory,” said Sungjin Park, who heads the $71 billion fixed-income division at Samsung Asset Management Co. in Seoul, South Korea’s largest private bond investor. “People are looking for alternatives.” Park said he favors bonds in Brazil and other emerging markets.
Yields (USGG10YR) on 10-year notes held at 2 percent as of 7:08 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 changed hands at 100 1/32.
The record low yield was 1.67 percent set on Sept. 23, versus the average of 3.90 percent for the past decade.
The Federal Reserve is scheduled to buy as much as $5 billion of Treasuries due from February 2018 to February 2020 today as part of its plan to hold down borrowing costs by exchanging shorter-term securities in its holdings for longer maturities.
Japan’s 10-year rate rose half a basis point to 0.945 percent today, while still declining from 0.975 percent a week ago.
Improved Labor Market
Treasuries fell yesterday after a government report showed initial claims for U.S. jobless benefits unexpectedly dropped to the lowest level since 2008, damping demand for haven assets. The yield increased six basis points, or 0.06 percentage point, the most since Feb. 7.
The Conference Board’s index of leading economic indicators, which signals the outlook for three to six months, rose 0.5 percent in January after a 0.4 percent gain in December, according to the median of economists’ forecasts in a Bloomberg News survey before the report today.
“The upside return prospects in Treasuries from today’s historically low yield levels appears modest at best,” Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock, wrote on the company’s website. “We have long thought the corporate sector looked attractive,” he wrote. BlackRock is based in New York and manages $3.51 trillion.
Narrowing Spreads
The Bank of America index of U.S. corporate and below- investment-grade bonds yields 2.96 percentage points more than Treasuries. The spread narrowed to 2.95 percentage points on Feb. 14, the least since August.
Assuming nonfinancial corporations are at least as healthy as they have been on average over the last 20 years, spreads should narrow by at least 50 basis points for investment-grade bonds and possibly by 100 basis points for high-yield debt, according to BlackRock’s report.
Central bank policy makers will take note of “improved data” on the economy, Richard Fisher, the president of the Fed Bank of Dallas, said yesterday on CNBC.
A few members of the central bank’s policy setting Federal Open Market Committee said the group may soon have to consider more asset purchases, while others said the economic outlook would have to deteriorate first, according to minutes of their Jan. 24-25 meeting issued Feb. 15.
Inflation Contained
Bond bulls say inflation is in check, providing a reason to buy Treasuries.
A Labor Department report today will probably show consumer prices climbed 2.8 percent in January from a year earlier, versus 3 percent the month before, based on a Bloomberg News survey of economists. Prices probably increased 0.3 percent in January from December, the survey shows.
Hourly earnings rose 1.9 percent in January from the same month in 2011 on average, the least since April, a Labor Department report showed Feb. 3.
“Deflationary pressures will push yields down,” said Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, which oversees the equivalent of $41.7 billion and is a unit of Japan’s second-largest publicly traded bank. Ten- year yields will fall to 1.5 percent by June 30, said Nakamura, who predicted 2011’s Treasuries rally.
Breakeven Rate
A measure of traders’ expectations for costs in the economy that the Fed tracks is at 2.54 percent, versus last year’s high of 3.23 percent. The five-year, five-year forward breakeven rate, which projects annualized price increases over a five-year period starting in 2017, is below its 2.76 percent average over the past decade.
Investors demanded 2.85 percentage points of extra yield to buy 30-year bonds, which are among the securities that are the most sensitive to inflation, instead of two-year notes. The spread has averaged 2.26 points over the past 10 years.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.26 percentage points. The average for the past decade is 2.14.
The 10-year rate will advance to 2.49 percent by year-end, according to a Bloomberg survey of banks and securities companies.
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
