BLBG:Treasuries Fall as Demand for High-Yield Bonds Rises
Treasuries fell as U.S. benchmark 10-year yields that are less than 2 percent drove demand for junk-rated corporate securities to the most in 19 months, while the Bank of Japan (8301) pledged to boost efforts to spur its economy.
Bonds in an index of riskier debt yielded 4.88 percentage points more than Treasuries on average, the smallest spread since May 2011, Bank of America Merrill Lynch data show. U.S. home sales rose in December, economists projected before a report today, helping curb demand for the relative safety of government debt. The Bank of Japan set a 2 percent inflation target and shifted to open-ended asset purchases in its strongest commitment to ending two decades of deflation.
“Money is chasing yield,” said Hajime Nagata, who helps oversee the equivalent of $114.9 billion as an investor in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co. “The U.S. economy is improving, and the housing market is leading the recovery. But the pace is very slow.”
U.S. 10-year yields rose two basis points, or 0.02 percentage point, to 1.86 percent as of 6:12 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 fell 5/32, or $1.56 per $1,000 face amount, to 97 7/8.
The rate is within half a percentage point of the record low of 1.38 percent set in July. It hasn’t been above 2 percent since April. Trading of U.S. government securities opened in Asia after being closed yesterday for the Martin Luther King Jr. holiday.
2014 Start
Ten-year notes trimmed losses after the central bank announced that, while it plans to adopt a policy of open-ended bond purchases, it won’t start until 2014.
Japan’s 10-year yield was little changed at 0.73 percent. It touched 0.725 percent earlier, a five-week low. The five-year yield was as low as 0.14 percent, a level not seen since the government started selling the debt in 2000.
U.S. sales of existing homes probably rose to the highest level in three years in December, based on responses from economists before the National Association of Realtors reports the figure at 10 a.m. New York time.
Yields show inflation expectations are rising.
The difference between rates on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.54 percentage points. It was the biggest difference in three months, based on closing levels. The average over the past decade is 2.19 percentage point.
The U.S. is in its best shape in two years, according to a Bloomberg survey of international investors conducted Jan. 17, with the majority describing the economy as improving.
Reducing Treasuries
Almost three-in-five expect to reduce their holdings of U.S. Treasury securities in the coming six months, while less than one in 20 plan on an increase. Two-thirds plan to boost stock holdings in the period.
The MSCI All-Country World Index (MXWD) of shares gained 17 percent including reinvested dividends last year, according to data compiled by Bloomberg. Treasuries returned 2.2 percent, and investment-grade corporate bonds gained 10 percent, Bank of America data show.
Junk bonds, or high-yield, high-risk debt, returned 16 percent, based on the indexes. The securities are ranked below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
“When it comes to fixed-income products, we believe high yield may still be the best game in town in 2013,” Mark E. Durbiano, the head of the domestic high-yield group at Federated Investors Inc. (FII), wrote on the company’s website last week.
Schwab Cautious
Returns may be 6 percent to 8.5 percent in 2013, according to Federated, which is based in Pittsburgh and manages $364.1 billion.
Charles Schwab Corp. in San Francisco with about $1.9 trillion in client assets is more cautious.
Investors considering “riskier sectors” of the bond market such as high-yield debt should limit their holdings, said Kathy A. Jones, a fixed-income strategist.
The bonds can have low credit quality and may be volatile and difficult to trade, Jones said in a video on the company’s website last week.
The Federal Reserve is purchasing $85 billion of government and mortgage debt each month to spur the economy by putting downward pressure on bond yields.
It plans to buy as much as $1.5 billion of Treasury Inflation Protected Securities maturing from April 2017 to February 2042 today as part of the program, according to the Fed Bank of New York website.
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
