BLBG:Treasury Hold Gain on Speculation Services Growth Slowed
Treasuries held gains from yesterday on speculation a U.S. report today will show service industries, the largest part of the economy, grew at a slower pace in April.
Yields are tumbling in high-rated bond markets as investors seek the safest assets amid cooling economic growth. Ten-year Treasury rates slid as far as 1.90 percent yesterday, approaching the all-time low of 1.67 percent set in September. The yield on similar-maturity debt in Germany fell to 1.60 percent yesterday, the least ever, while the Australian rate dropped to a record 3.53 percent on May 1.
“We’re in a new environment where yields will be lower in the high-quality assets,” said Bin Gao, head of rates research in Hong Kong for Asia and the Pacific at Bank of America Merrill Lynch. “We’re running out of high-quality bonds.”
U.S. 10-year rates were little changed from yesterday’s closing level at 1.92 percent as of 7:02 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 changed hands at 100 23/32. The rate fell two basis points, or 0.02 percentage point, yesterday.
Germany and Australia both have AAA debt rankings from Moody’s Investors Service, Fitch Ratings and Standard & Poor’s. The U.S. has the top grades from Moody’s and Fitch and is ranked one step lower at AA+ by S&P.
Financial markets are closed in Japan today and tomorrow for holidays.
Service Industries
The Institute for Supply Management’s index of non- manufacturing industries in the U.S. probably slowed to a four- month low of 55.3 in April from 56 in March, according to the median projection of 74 economists surveyed by Bloomberg News. Services make up about 90 percent of the economy. Another report today will show first-time claims for jobless benefits declined last week, according to a separate survey.
A euro-region factory gauge based on a poll of purchasing managers slipped to a 34-month low, London-based Markit Economics said yesterday. Euro-region unemployment rose to a 15- year high, the European Union statistics office reported yesterday.
The Federal Reserve plans to buy as much as $2 billion of Treasuries due from February 2036 to February 2042 today, according to the Fed Bank of New York’s website.
The purchases are part of the U.S. central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.
Yield Forecasts
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, known as QE1 and QE2, to support the economy. It has also pledged to keep its target for overnight bank lending at almost zero until at least late 2014.
The rally is poised to end, based on Bloomberg surveys of economists. U.S. 10-year yields will increase to 2.53 percent by year-end, based on the responses, with the most recent projections given the heaviest weightings.
“Yields will head back up,” said Andy Cossor, the Hong Kong-based chief market strategist at DZ Bank AG, Germany’s fourth-largest lender. “We’re looking for better economic data from the U.S. The U.S. is not going into a recession, and therefore there will be no justification for launching QE3.”
Ten-year rates will rise to 2.25 percent in three months, DZ predicts.
U.S. employers probably added 160,000 workers in April, versus 120,000 in March, according to a Bloomberg survey of economists before the Labor Department data tomorrow.
High-yield bonds can help debt investors increase their incomes, according to Fidelity Investments, the Boston-based fund company that oversees $1.61 trillion. The securities are rated below BBB- by Standard & Poor’s and Baa3 by Moody’s.
“The problem is, there’s very little yield in fixed income today,” Matt Conti, manager of the Fidelity Focused High Income Fund, said in a report on the company’s website yesterday. “That forces investors to look at asset classes like high yield, where there still is some income.”
A Bank of America Merrill Lynch index of bonds that carry S&P’s top three below-investment-grade rankings yields 4.27 percentage points more than Treasuries. Demand for the securities has narrowed the spread from 5.10 percentage points at the end of last year.
Investor appetite for debt helped drive Bill Gross’s Total Return Fund at Pacific Investment Management Co., the world’s biggest mutual fund, to a record $258.7 billion, according to the company’s website.
The fund has returned 4.4 percent this year, beating 98 percent of its peers, according to data compiled by Bloomberg. The company, based in Newport Beach, California, is a unit of the Munich-based insurer Allianz SE. (ALV)
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
