BLBG:Treasuries Decline After 7-Year Yield Matches Record Low
Treasuries fell, after seven-year yields matched the record low set yesterday, as some investors said U.S. government securities are vulnerable to a pickup in economic growth.
Greece’s struggle to stay in the euro bloc has driven an eight-week rally in Treasuries. The securities returned 3.2 percent since 10-year yields set this year’s highest closing level on March 19 through yesterday, according to Bank of America Merrill Lynch indexes. Investors tracking the MSCI All- Country World Index of stocks lost 7.3 percent in the period, including reinvested dividends.
“The Treasury market is a bubble,” said Kei Katayama, who invests in U.S. debt in Tokyo at Daiwa SB Investments Ltd., which has the equivalent of $62.1 billion in assets. “It may continue for a while, but yields should go up. The U.S. is stronger than other economies.”
The 10-year yield rose two basis points, or 0.02 percentage point, to 1.78 percent at 8:38 a.m. in London, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 fell 6/32, or $1.88 per $1,000 face amount, to 99 21/32. They dropped to a record 1.67 percent on Sept. 23.
Seven-year yield climbed three basis points to 1.2 percent, after matching the all-time low of 1.1679 percent set yesterday.
Katayama said the rally isn’t making him change his strategy of favoring shorter maturities, which investors use to protect themselves in case yields rise.
Faster Growth
U.S. gross domestic product will grow 2.3 percent this year, after expanding 1.7 percent in 2011, according to a Bloomberg News survey. The euro-area economy will shrink 0.3 percent, versus last year’s 1.5 percent expansion, separate surveys show.
Greece’s inability to form a government reignited concern the country will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since 2010, pushing borrowing costs higher and potentially leading the nation to leave the euro area. Greek 10-year yields have risen to 27.07 percent from 21.13 percent a month ago.
“We could see panic buying” in Treasuries, said Hideo Shimomura, who helps oversee the equivalent of $75.2 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank. “Europe is in a recession and it could spread.”
Shimomura said he is adding to his holdings of long- maturity Treasuries. Yields on 30-year bonds will fall to 2.5 percent in the next two months from 2.94 percent now, he said.
Eight-Week Rally
Thirty-year bonds have surged 11 percent during the eight- week rally, while two-year notes returned 0.3 percent, the Bank of America indexes show.
Overseas demand for U.S. assets increased in March, according to a Bloomberg survey of economists before a Treasury Department report today.
Net purchases of long-term U.S. bonds, stocks and other assets by investors outside the nation rose to $32.5 billion from $10.1 billion in February, based on the median estimate.
The U.S. consumer price index was unchanged in April, following a 0.3 percent gain in March, based on a Bloomberg survey of banks and securities companies before the Labor Department reports the figure today.
Retail Sales
Retail sales growth slowed to 0.1 percent in April from 0.8 percent in March, a separate survey showed, before the Commerce Department report.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.14 percentage points. The figure is close to the 2.15 percentage point average over the past decade.
The Federal Reserve plans to sell as much as $8.75 billion of Treasuries due from February to May 2014 today, according to the Fed Bank of New York’s website. The sales are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep borrowing costs down.
Bill Irving, manager of the Fidelity Inflation-Protected Bond Fund (FINPX), said he is “cautious” about conventional U.S. debt and TIPS.
“They are vulnerable in the event that GDP growth strengthens and yields increase back to more normal long-term levels,” he wrote in a report on the company’s website yesterday. Fidelity Investments, based in Boston, oversees $1.61 trillion.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
