BLBG:Treasury Investors Cut Bets on Inflation on Slowing Signs
Treasury investors cut bets on inflation over the next five years to the least in two months on speculation the world’s biggest economy is slowing.
The difference between yields on U.S. five-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 1.88 percentage points yesterday, the least since Feb. 16. More Americans than forecast filed claims for jobless benefits and sales of previously owned homes dropped, reports showed yesterday, helping send yields down for a fifth week.
“The rally will continue,” said Hiromasa Nakamura, who invests in Treasuries at Mizuho Asset Management Co., a unit of Japan’s second-largest listed bank. “Inflation will gradually decrease. Employment and housing are especially fragile.”
Benchmark 10-year yields were little changed at 1.97 percent as of 7 a.m. in London, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2022 was 100 8/32.
The rate has tumbled from 3.41 percent a year ago. It fell one basis point, or 0.01 percentage point, this week. A fifth weekly decline would be the longest run since June.
Mizuho Asset Management, which oversees the equivalent of $40.3 billion, favors Treasuries due in longer than 10 years, those securities that will rally most if yields fall, Tokyo- based Nakamura said.
Japan’s 10-year rate was little changed at 0.935 percent. It was 0.93 percent on April 16 and April 17, the lowest level since November 2010.
‘Behind the Curve’
U.S. consumer prices increased 2.7 percent in the year ended in March, the smallest 12-month gain in a year, Labor Department figures showed April 13.
Federal Reserve efforts to spur economic growth may lead to higher costs in the economy, said Martin Fridson, global credit strategist at BNP Paribas Investment Partners. BNP Paribas Securities Corp. is one of the 21 primary dealers that trade directly with the Fed.
The Fed may fall “behind the curve” and inflation will “likely to start become a threat,” New York-based Fridson said yesterday in a radio interview with Tom Keene.
The U.S. sold $16 billion in five-year Treasury Inflation Protected Securities at a record low yield of negative 1.08 percent yesterday as investors sought insurance against rising prices. TIPS of all maturities have returned 2.2 percent this year, while conventional Treasuries are little changed, according to Bank of America Merrill Lynch indexes.
Jobless Claims
The difference between yields on 10-year notes and same- maturity TIPS was 2.21 percentage points, more than the average over the past decade of 2.14 percentage points.
The Fed has pledged to keep its benchmark interest rate near zero until at least late 2014 to support growth.
The U.S. central bank is also replacing $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.
It is scheduled to sell as much as $8.75 billion of Treasuries due from February 2014 to May 2014 today as part of the program, according to the New York Fed’s website.
Abby Joseph Cohen, senior U.S. investment strategist at Goldman Sachs Group Inc. in New York, is recommending stocks over bonds. Goldman Sachs is another primary dealer.
“With yields at very low levels, bonds may not be all that safe,” she told Tom Keene yesterday. “When yields do start to rise, as they may at some point in the future, prices go down.”
Dan Fuss, one of the investors for the Loomis Sayles Bond Fund (LSBDX) in Boston, told Keene yesterday that U.S. bonds are expensive.
Europe, U.S. Jobs
“Treasuries are priced higher than a kite,” Fuss said. “Odds are interest rates will be higher in the future.”
The $21.2 billion fund returned 6.5 percent this year, beating 98 percent of its competitors, according to data compiled by Bloomberg.
Treasury 10-year yields were less than 2 percent for a fifth day yesterday on concern the European debt crisis will worsen and as U.S. jobless claims and home sales missed forecasts, stoking demand for the safest assets.
“Fixed-income investors are not ignoring the fact that, over the last three weeks, economic data have been worsening,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “Europe is obviously an important portion of the story.”
With finance chiefs from the Group of 20 nations meeting today in Washington, those from Canada and Australia joined the International Monetary Fund and U.S. in pressing Europe to intensify efforts to quell the turmoil as it spreads to Spain. The G-20 cited “the situation in Europe” first in a list of drags on the world economy, according to a draft statement obtained by Bloomberg News.
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
