BLBG:Treasuries Fall on Speculation Yields Are Too Low
Treasuries fell for the first time this week on speculation the Federal Reserve’s pledge to keep interest rates low will encourage money managers to look for higher yields from other investments.
U.S. government securities have dropped 0.1 percent, or 4.7 percent at an annual rate, since the central bank’s Sept. 13 announcement, Bank of America Merrill Lynch indexes show. Investment-grade and high-yield bonds returned 0.5 percent, or 31 percent annualized, based on the gauges.
“Investors are looking for riskier assets,” said Chungkeun Oh, who buys bonds in the biggest markets for Industrial Bank of Korea (024110), South Korea’s largest lender to small- and medium-sized companies. “There’s also inflation pressure. I’m a bit bearish” on U.S. government debt, he said.
Benchmark 10-year yields rose two basis points, or 0.02 percentage point, to 1.79 percent as of 6:54 a.m. in London, according to Bloomberg Bond Trader data. The record low was 1.38 percent set July 25. The price of the 1.625 percent security due in August 2022 declined 6/32, or $1.88 per $1,000 face amount, to 98 17/32.
The MSCI Asia Pacific Index of stocks gained 0.8 percent, rebounding from a 1.4 percent decline yesterday and helping curb demand for the relative safety of debt.
Japan’s 10-year rate was unchanged at 0.80 percent. It has been in a range of 0.72 percent to 0.86 percent for the past three months.
Swap Spread
Demand for investments outside the government debt market pushed yields on 10-year interest-rate swaps below Treasury rates yesterday, the first negative reading in two years.
Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of investor demand for higher-yielding assets. The spread is usually positive because investors demand higher yields to compensate for the risk of a swap, a transaction between banks, than they do to lend to the U.S. government.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, widened to 2.73 percentage points on Sept. 17, the most in six years. It was 2.5 percentage points today.
Fed Outlook
Fed Bank of Minneapolis President Narayana Kocherlakota said yesterday policy makers should hold interest rates at about zero until unemployment drops below 5.5 percent from 8.1 percent now.
Kocherlakota is hinting the Fed may be targeting 5.5 percent, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter yesterday.
“If so, they could be at this for a long long time,” wrote Gross, who is based in Newport Beach, California.
The Fed said it would buy $40 billion of mortgage-backed bonds a month to put downward pressure on borrowing costs. It pledged to keep its target for overnight loans between banks close to zero until at least the middle of 2015.
The central bank is also swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years. It plans to buy as much as $2 billion of debt maturing from November 2022 to February 2031 today as part of the program, according to Fed Bank of New York’s website.
Troubled Economy
Treasuries gained earlier in the week on speculation Fed efforts to spur growth in gross domestic product will take time.
Hiromasa Nakamura, who invests in U.S. debt from Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion, said he views the Fed’s position as bullish for bonds because it means the economy is troubled.
“Treasuries will be the best bond market,” he said. Mizuho prefers 10-year and 30-year securities, those that rise most in price if yields fall, he said.
Treasuries pared gains yesterday as an auction of inflation-indexed notes drew the weakest demand in more than three years.
The $13 billion 10-year issue’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, the lowest level since April 2009.
The government plans to sell $35 billion of two-year notes Sept. 25, the same amount of five-year debt the next day and $29 billion of seven-year securities Sept. 27.
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
