BLBG:Treasuries Set to Beat Corporate Bonds in November
U.S. government bonds were poised to beat corporate debt this month for the first time since May as the pending fiscal cliff and Europe’s debt crisis drove demand for safety.
Treasuries returned 0.5 percent in November as of yesterday, while bonds in an index of investment-grade and high- yield debt were little changed, according to Bank of America Merrill Lynch data. Investors tracking the Standard & Poor’s 500 Index earned 0.6 percent, according to data compiled by Bloomberg. Consumer spending probably cooled in October, economists said before a report today.
“There’s a flight to quality,” said Hiromasa Nakamura, a senior investor for Tokyo-based Mizuho Asset Management Co., which oversees the equivalent of $40 billion and is part of Japan’s third-biggest bank. “The government may increase taxes on higher-end households. That’s negative for the stock market and the economy.”
Benchmark 10-year yields were little changed today at 1.62 percent as of 2:30 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 was 100 1/32. The rate slid seven basis points, or 0.07 percentage point, this month in the first decline since July.
The yield will tumble to 1 percent by the end of 2013, said Nakamura, who correctly predicted gains in Treasuries this year and last. A Bloomberg survey of banks and securities companies projects an increase to 2.27 percent, with the most recent projections given the heaviest weightings.
Japan’s 10-year rate was unchanged from yesterday at 0.71 percent, the least since 2003.
Tax Cuts
To avoid the so-called U.S. fiscal cliff of tax increases and spending cuts set to take effect in January, President Barack Obama is seeking to overcome Republican resistance to his plan to let tax cuts expire for households earning more than $250,000 a year.
Bonds in an index of U.S. high-yield, high-risk securities pay 5.58 percentage points more than Treasuries, the Bank of America figures show.
The difference narrowed from 7.79 percentage points a year ago as 10-year Treasury rates that fell to a record 1.38 percent in July sent investors hunting for higher yields outside the government bond market.
The spread may widen beyond 8 percentage points if government officials fail to avert the fiscal cliff, John Lonski, the chief economist at Moody’s Investors Service, wrote in a report yesterday.
Not ‘Onerous’
“Markets now effectively assume that impending tax hikes will not be especially onerous and that the preponderance of federal spending cuts will occur well into the future,” Lonski wrote. “If these assumptions prove to be overly optimistic, share prices will plunge and credit spreads will swell.”
Treasuries and German bunds are “overbought,” while some corporate bonds are attractive, said Andreas Utermann, the global chief investment officer at Allianz Global Investors, which oversees the equivalent of $362.6 billion. German 10-year notes yield 1.37 percent.
Investors should favor company debt due in two to four years, Utermann said.
“You need to stay relatively short to medium term to make sure that you don’t get caught by a sudden rise” in longer-term borrowing costs,’’ he said yesterday on Bloomberg Television’s “On the Move” with Francine Lacqua in London. “And then with a buy-and-hold strategy with a view to getting the yield to maturity on these bonds. That’ll probably just about compensate you for inflation.”
Higher Yields
Jeffrey Rosenberg, the New York-based chief investment strategist for fixed income at BlackRock Inc. (BLK), the world’s biggest asset manager overseeing $3.67 trillion, also cautioned that Treasury 10-year yields are less than the inflation rate. Consumer prices rose at a 2.2 percent pace in October, according to the Labor Department.
“There are not-so-risky corporate bonds that offer higher yields, not tremendously higher, but at least the yield is above the level of inflation,” he said yesterday on the “Bloomberg Surveillance” radio program with Tom Keene and Michael McKee in New York.
Treasuries drew support in November, boosting demand at auctions of two-, five- and seven-year notes this week, as the U.S. economy had trouble gaining traction and European officials put together a rescue plan for Greece’s finances.
U.S. household purchases were unchanged in October, after increasing 0.8 percent in September, based on the median estimate from 79 economists surveyed by Bloomberg News before the Commerce Department report at 8:30 a.m. New York time today.
Greek Debt
Greece’s debt burden is unsustainable even after the nation won an aid package this month, Moody’s said in a report yesterday. The probability of default on privately held Greek debt is “high,” the report said.
The Federal Reserve is selling shorter-term Treasuries from its holdings and buying those due in 6 to 30 years as it seeks to spur the economy by capping borrowing costs, under a program scheduled to end in December.
It plans to purchase as much as $2.25 billion of Treasuries maturing from February 2036 to November 2042 today, according to the Fed Bank of New York’s 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
