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 showed signs of improvement.
U.S. 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. An index of investment-grade and high-yield corporate bonds returned 3.2 percent, the most since the July-to-September period of 2010, the figures showed. The return from Treasuries also lagged behind German bonds and Japanese debt during the same period.
“Given the improvement in risk appetite and the recent strength of U.S. data, some investors are reluctant to hold Treasuries at current yield levels,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “U.S. reports in coming weeks are likely to confirm that the economy is going at a reasonable pace. Yields have further room to rise.”
The 10-year yield was little changed at 2.17 percent at 10:55 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 traded at 98 15/32. The yield 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.
Higher Incomes
A U.S. report today will 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.
“The U.S. has got some legs at least for the next couple of quarters,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview with Bloomberg Television in Italy. “Big picture, there remain all sorts of issues but I think the U.S. is going to continue to positively surprise.”
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 for 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.”
Surprise Index
The Citigroup Economic Surprise Index (CESIUSD), which shows whether U.S. data beat or fell short of forecasts, slid to 19.6 yesterday, the lowest since Nov. 4.
Treasuries rose yesterday as investors sought the safest assets on speculation Europe’s debt crisis will worsen 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 will 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.
Real Yields
Treasury rates have improved over the past six months after accounting for inflation. Ten-year notes have a so-called real yield of minus 70 basis points, compared with minus 1.52 percent at the start of the year.
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.
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.”
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 financial companies with the most recent projections given the heaviest weightings.
To contact the reporter on this story: Anchalee Worrachate in London at =7073-3403 or aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
