BLBG:Treasuries Have Worst Quarter Since 2010 on Growth Signs
Treasuries headed for their steepest quarterly decline since the last three months of 2010, while corporate bonds surged, as the U.S. economy shows signs of improvement.
Government securities handed investors a 1 percent loss since Dec. 31 as of yesterday, according to Bank of America Merrill Lynch indexes, reflecting declining demand for the relative safety of U.S. debt during the period. An index of the nation’s investment-grade and high-yield corporate bonds returned 3.2 percent, the most since the July-to-September period of 2010, the figures showed.
“Corporate and emerging-market bonds might be a better choice than Treasuries for the second quarter,” said Will Tseng, who trades U.S. bonds at Taipei-based Shin Kong Life Insurance Co., which has the equivalent of $52.1 billion in assets and is Taiwan’s third-largest life insurer. “I wouldn’t say the U.S. economy is good, but it’s more stable than a couple of months ago.”
Ten-year notes yielded 2.16 percent as of 6:50 a.m. in London, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2022 was 98 19/32.
The rate climbed to 2.40 percent on March 20, the highest level since Oct. 28. The average over the past decade is 3.86 percent.
An index of dollar-denominated emerging-market sovereign bonds returned 4.1 percent this quarter, the Bank of America Merrill Lynch figures show.
Japan’s 10-year yield was little changed at 0.985 percent today. The nation’s government debt market gained 0.2 percent since the end of last year.
Higher Incomes, Spending
A U.S. report today will probably show personal spending rose the most in five months and incomes increased, according to Bloomberg News surveys of economists. The U.S. jobless rate was 8.3 percent in February, the lowest level in three years, the Labor Department said March 9. The Institute for Supply Management’s factory index shows 31 months of expansion.
Some investors are questioning whether the economy can maintain the first quarter’s pace.
“Yields can go lower,” said Chungkeun Oh, who invests in Treasuries and tracks the U.S. at Industrial Bank of Korea (024110) in Seoul, South Korea’s largest lender to small- and medium-sized companies. “We may have good news, but expectations are too high. Softer numbers will be quite disappointing.”
The Citigroup Economic Surprise Index (CESIUSD), which shows whether U.S. data beat or fell short of forecasts, slid to a four-month low of 19.6 yesterday.
European Concern
Treasuries rose yesterday as investors sought the safest assets on concern Europe’s debt crisis will flare again. Greece will probably have to restructure its debt for a second time, Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, said March 28.
U.S. government data today may also show the annual price index for personal consumption expenditures fell to 2.3 percent in February from 2.4 percent in January, according to a Bloomberg survey of economists. That would be the least since March 2011. The Federal Reserve set a target of 2 percent for the inflation gauge in January.
Treasury rates have improved over the past six months after accounting for inflation.
Ten-year notes have a so-called real yield of negative 24 basis points based on January’s personal spending price index. The deficit was negative 1.14 percentage points in October.
Using the Labor Department’s consumer price index, the yield after inflation is negative 74 basis points, about a third of the deficit in October.
Economic data today will also show consumer sentiment fell in March from February and Chicago-area manufacturing expanded, albeit at a slower pace, according to Bloomberg surveys.
Raising Rates
The Fed plans to buy as much as $2.25 billion of Treasuries maturing from February 2036 to February 2042 today as part of a program to replace $400 billion of shorter-term debt with longer maturities to hold down borrowing costs. The central bank bought $2.3 trillion of debt under two rounds of quantitative easing from December 2008 to June 2011.
Fed Bank of Philadelphia President Charles Plosser said the central bank may need to raise interest rates before late 2014 and additional stimulus isn’t necessary as the U.S. economy shows signs of strength.
“We should not anticipate additional accommodation,” Plosser said yesterday in a speech in Wilmington, Delaware. “In the absence of some shock that derails the recovery, we may well need to raise rates before the end of 2014.”
Rate Near Zero
The Fed has said economic conditions will probably warrant keeping its benchmark rate at almost zero until at least late 2014. It has kept its target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.
Thirty-day fed funds futures for delivery in April 2014 yielded 0.51 percent, indicating some traders expect the central bank to raise borrowing costs by then. The contract settles at the average overnight fed funds rate for the delivery month.
Ten-year yields will increase to 2.56 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings.
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
