BLBG:Treasuries Hold Gain; Fischer Says World Near Recession
Treasuries held a four-day gain after Bank of Israel Governor Stanley Fischer said the world is “awfully close” to a recession, as he backed the Federal Reserve’s increase in bond purchases.
Federated Investors Inc. (FII) and Vanguard Group Inc., which together oversee more than $2 trillion, cautioned against seeking higher yields in bonds that carry greater risk. While there has been “a lot of progress made” to improve the global economy, its impact hasn’t materialized, Fischer said in an interview in Tokyo with Bloomberg Television airing today. The Fed announced last month a third round of debt purchases under its policy of quantitative easing, known as QE3.
“QE3 will continue, so it will be difficult for yields to go up,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $72.5 billion in assets. “Business confidence is not good” in the U.S., he said.
Benchmark 10-year notes yielded 1.66 percent at 8:57 a.m. London time after dropping nine basis points last week, based on Bloomberg Bond Trader data. The price of the 1.625 percent security due August 2022 was 99 23/32. The record low was 1.38 percent set on July 25.
Ten-year rates will be in a range of 1.5 percent to 2 percent through the rest of 2012, Suzuki said. A Bloomberg survey of economists projects the yield will be 1.76 percent by Dec. 31, with the most recent projections given the heaviest weightings.
‘Awfully Close’
“We’re awfully close” to a global recession, Fischer said. “It’s pretty slow right now. Europe is technically in a recession, the U.S. is predicting less than 2 percent growth for the next few months.”
China’s exports and money supply grew more than estimated in September from a year earlier, official reports showed on Oct. 13.
Consumer prices rose 1.9 percent in September from the year before, government figures showed today. This year’s low was 1.8 percent in July, which was the least since January 2010.
U.S. retail sales increased 0.8 percent in September from August, gaining for a third month, according to a Bloomberg News survey of economists before the Commerce Department publishes its report today.
Near-Zero Rates
The Fed announced Sept. 13 it will keep its main interest rate at almost zero until at least mid-2015 and buy $40 billion of mortgage debt every month. The unemployment rate in the U.S. unexpectedly fell to 7.8 percent last month.
“The bar for stopping asset purchases is very high, in our view, and the time needed to gauge whether a substantial improvement in the labor market outlook has happened implies that the current pace of purchases would be maintained at least through the middle of next year, if not well into next,” Barclays strategists including New York-based Anshul Pradhan wrote in an e-mailed note.
The central bank is also swapping shorter-term securities in its holdings for longer maturities. It plans to buy as much as $5.25 billion of Treasuries due from October 2018 to August 2020 today as part of the plan, according to the Fed Bank of New York’s website.
Yields indicate growing demand for debt outside the Treasury market.
The difference between two-year interest-rate swaps and same-maturity Treasury yields narrowed to as little as 10.5 basis points on Oct. 12, the least since March 2010.
Investors use swaps to exchange fixed and floating interest-rate obligations. The spread between the fixed component and the Treasury rate narrows as demand for higher- yielding assets increases.
Extra Yield
Bonds in an index of corporate investment-grade and high- yield securities yielded 2.36 percentage points more than Treasuries, versus 3.48 percentage points at the end of last year, according to Bank of America Merrill Lynch data.
Securities in the index have returned 10 percent this year, versus 2.2 percent for Treasuries.
“Given that returns have been strong, we don’t want to overstay our welcome in spread products,” Robert J. Ostrowski, chief investment officer for the taxable fixed-income group at Federated Investors, wrote on the company’s website on Oct. 12. “We have become more defensive,” according to Federated, which oversees $355.9 billion and is based in Pittsburgh.
Investors in high-yield debt may face “heightened defaults and restructurings,” according to Michael L. Hong, who manages the Vanguard High-Yield Corporate Fund, writing on the company’s website on Oct. 12. Vanguard, based in Valley Forge, Pennsylvania, manages almost $1.95 trillion.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
