Treasuries advanced, pushing 10- and five-year yields down to record lows, before reports this week that may show growth in world’s biggest economy cooled and manufacturing and services output in the euro area stalled.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter that real assets are a “better bet” amid negative real interest rates in the U.S. Treasuries have handed investors a 1.2 percent return this month after a 0.4 percent decline in June, according to data from Bank of America Merrill Lynch.
“Soft data in the U.S. is pretty consistent with what’s been happening across the globe,” said Michael Turner, an economist at RBC Capital Markets Ltd. in Sydney. “Yields are pretty low and there’s probably a fair bit of safe haven-type flow into them.”
Ten-year yields touched a record 1.4347 percent and were at 1.44 percent as of 1:24 p.m. in Tokyo, two basis points below the close on July 20. The five-year yield slid to an all-time low of 0.5555 percent, while the rate on two-year U.S. government debt declined to as low as 0.1933 percent, the least since September 2011.
Today’s record for benchmark Treasuries compares with an average of 3.76 percent in the past decade, according to data compiled by Bloomberg.
Japan’s 10-year rate was at 0.725 percent after it earlier fell as much 2 1/2 basis points to 0.72 percent, a level unseen since June 2003.
Real Assets
The U.S. economy probably grew at an annualized 1.4 percent in the three months through June, according to the median forecast in a Bloomberg News survey before the Commerce Department releases the data on July 27. That would be the slowest pace since the quarter ended June 2011 and compares with a 1.9 percent rate in the previous period.
Investors may maintain purchasing power with real assets, Pimco’s Gross wrote on Twitter. His $263 billion Total Return Fund had 52 percent of its assets in mortgage-related bonds and 35 percent in Treasuries as of June 30, according to the company’s website.
The cost of living in the U.S. rose 1.7 percent in June from a year earlier, according to a July 17 report. The difference between the consumer-price rate and 10-year Treasury yields, so-called real yield, is negative 26 basis points.
With yields on benchmark government bonds paying less than zero percent, the world’s biggest fixed-income investors are increasing holdings of corporate debt as a haven.
Corporate Haven
BlackRock Inc. (BLK), Glenmede Corp. and at least four other firms that collectively manage in excess of $4 trillion are putting more of their money into the bonds of companies, contributing to a record rally. The Bank of America Merrill Lynch Global Broad Market Corporate Index, which tracks 9,542 debentures, is on pace to gain 2.3 percent in July, the most since being created in 1997, and 14 percent for the year including reinvested interest.
Treasuries are “expensive,” but yields might remain at current levels for “quite some time,” according to Roger Bridges, who oversees $15.3 billion as the Sydney-based head of fixed income at Tyndall Investment Management Ltd. Bridges said he is holding off from purchases of the debt.
Valuation measures show U.S. sovereign securities are at the most costly levels ever. The term premium, a model created by economists at the Federal Reserve, touched negative 0.98 percent, the most expensive level ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Ten-year yields will climb to 1.9 percent by Dec. 31, according to the median estimate of economists in a Bloomberg News survey this month.
The 1.75 percent security due in May 2022 rose 5/32, or $1.56 per $1,000 face amount, to 102 27/32.
‘Well-Bid’
Concern about Europe “and uncertainty about the U.S. economy is picking up,” Bridges said. “It’s obviously going to keep Treasuries fairly well-bid.”
Treasuries are set for an advance this month, according to the Bank of America Merrill Lynch U.S. Treasury Master Index, as investors seek safer assets amid concern global growth is slowing.
Figures from London-based Markit Economics due tomorrow may show a composite index based on a survey of purchasing managers in manufacturing and services in the 17-nation euro area was unchanged at 46.4 this month from June, according to economists in a Bloomberg poll. A reading below 50 indicates contraction.
Spain is due to sell bills tomorrow after benchmark borrowing costs climbed toward a euro-era record last week. The same day, Greece’s troika of international creditors is due to arrive in Athens amid renewed concerns the nation will fail to meet its financial commitments.
China’s economic expansion may slow to 7.4 percent this quarter, Song Guoqing, an academic member of the People’s Bank of China monetary policy committee, said at a forum in Beijing on July 21. The world’s second-biggest economy grew 7.6 percent in the three months through June from a year earlier.
To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
