BLBG:Treasuries Tumble in May as Siegel Sees Demand for Stocks
Treasuries were near the least expensive level in a month as investors prepared to bid at three debt sales starting today, with Wharton School finance professor Jeremy Siegel warning that investors will dump bonds for stocks.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was minus 0.75 percent. It was negative 0.746 percent yesterday, the closest to zero since April 2. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“The stock market will beat returns for Treasuries,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “The U.S. economy is much stronger” than in the past few years, he said.
Benchmark 10-year yields declined one basis point to 1.75 percent as of 1:25 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The price of the 2 percent security due February 2023 rose 1/8, or $1.25 cents per $1,000 face amount, to 102 9/32.
The rate has climbed from this year’s low of 1.612 percent set last week. It jumped 11 basis points on May 3 after a U.S. report showed employers took on more workers in April than economists predicted and the unemployment rate unexpectedly fell to a four-year low of 7.5 percent.
The U.S. yield will be higher than 2.5 percent by Dec. 31, Shimazu said. A basis point is 0.01 percentage point.
Japan’s 10-year rate increased two basis points to 0.58 percent today. It has risen from the record low of 0.315 percent set in April.
Debt Ceiling
Treasuries are drawing support today from speculation the U.S. federal debt ceiling will curb government spending, said Will Tseng, a bond trader in Taipei at Mirae Asset Global Investments, which oversees $50 billion.
“The U.S. government is a big creator of jobs,” Tseng said. “If it cuts spending, it may cause the job market to be volatile. That will cause the rate to go lower” on Treasury securities, he said.
President Barack Obama on Feb. 4 signed legislation suspending the $16.4 trillion debt limit through May 18. The Treasury Department said May 1 that it can use “extraordinary measures” to meet its obligations and to stay under the ceiling “for a period of time after May 19.”
Siegel’s Forecast
Investors will favor U.S. shares over bonds, said Siegel, who is a professor at the University of Pennsylvania’s Wharton School and author of the book “Stocks for the Long Run.” Job gains will lead Federal Reserve officials to consider scaling back bond purchases, known as quantitative easing, he said.
The Fed is scooping up $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs.
“You’re going to get some continued rotation out of bonds, out of bank accounts, out of money funds,” Siegel said yesterday on Bloomberg Television’s “Street Smart” with Trish Regan and Adam Johnson. “All we need is a couple more strong employment figures. You’re going to hear more people from the Fed saying, ’Yeah maybe we should taper off QE.’ You’re going to see that 10-year bond go to 2 1/2 before you can turn around.”
The Treasury Department plans to auction $32 billion of 3- year notes today, $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on May 9.
The last three-year auction on April 9 drew bids for 3.24 times the amount of debt available, the lowest level since September 2011 for the monthly sales.
U.S. government securities have fallen 0.5 percent this month as of yesterday, or 25 percent at a yearly rate, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index returned 1.3 percent, or 116 percent annualized, according to data compiled by Bloomberg.
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
