U.S. 10-Year Yield Near 16-Month Low; Overseas Funds May Boost Purchases
Aug. 13 (Bloomberg) -- Mohammed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., discusses Federal Reserve monetary policy. El-Erian, speaking with Tom Keene and Ken Prewitt on Bloomberg Radio's "Bloomberg Surveillance," also discusses deflation and the outlook for the U.S. economy. (This report is an excerpt of the full interview. Source: Bloomberg)
Treasury 10-year yields dropped to a 16-month low as the Federal Reserve said it would resume buying U.S. government debt to bolster a faltering economic recovery.
The benchmark yields fell for a third straight week as government reports showed retail sales increased in July less than economists forecast and the annual rate of inflation remained at a 44-year low for a fourth month. The central bank will return to buying debt on Aug. 17 with purchases of maturities from August 2014 to July 2016.
“Market participants are going to be hard-pressed to push rates higher because you’re going against the Fed,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of the 18 primary dealers that trade directly with the central bank. “It’s going to be very hard in this period to push rates higher unless you get good growth.”
The yield on the 10-year note decreased 15 basis points to 2.67 percent, the lowest level in 16 months, according to BGCantor Market Data, from 2.82 percent on Aug. 6. A basis point is 0.01 percentage point. The two-year yield rose for the first time in 11 weeks, increasing 2 basis points to 0.53 percent after sliding on Aug. 11 to a record low 0.4892 percent.
The extra yield Treasury investors demand to hold 10-year notes over 2-year securities narrowed 0.16 percentage point to 2.15 percentage points, indicating the flattest yield curve since April 2009.
Fed Decision
The Fed said following its policy meeting on Aug. 10 that it will reinvest principal payments on mortgage assets it holds into long-term Treasuries after judging that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”
Central bankers adopted a $2.05 trillion floor for their securities portfolio, pivoting toward a quantitative target for monetary policy. The central bank plans to buy about $18 billion of Treasuries and inflation-protected securities by the middle of September.
“The Fed has set the groundwork for quantitative easing, and the bond market is likely telling you that it won’t be enough,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a research note to clients.
Retail sales rose a less-than-expected 0.4 percent last month after a revised 0.3 percent drop in June, the Commerce Department said yesterday. The median forecast of 77 economists in a Bloomberg News survey was for a 0.5 percent gain.
Tepid Inflation
Consumer prices excluding food and energy increased 0.9 percent in July from the year before, matching the smallest year-over-year gain since 1966, the Labor Department reported. Overall prices rose 0.3 percent from the previous month, following three consecutive drops.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a measure of expectations for consumer prices, narrowed to 1.64 percentage points, the lowest level since September.
The extra yield investors demand for the additional risk of holding company bonds instead of Treasuries rose to 1.91 percentage points as of Aug. 12, from 1.86 percentage points on Aug. 9, the day before the Fed’s decision, according to the Bank of America Merrill Lynch U.S. Corporate Master index.
“We still have risk aversion in the markets,” said Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York. “We’ll need to see weaker data prints in order for Treasuries to gain much further.”
U.S. Auctions
The Treasury sold $34 billion of three-year notes at a record-low yield of 0.844 percent Aug. 10, $24 billion of 10- year notes the next day at 2.730 percent, the lowest yield since January 2009, and $16 billion of 30-year bonds on Aug. 12 at 3.954 percent, the lowest yield since March 2009.
Primary dealers were awarded less than half the securities sold at each offering as direct and indirect bidders have taken an increasing proportion of government debt offerings this year.
Investors should sell 5-year notes in favor of 2- and 10- year Treasuries, betting that their “exceptional performance” will wane, Brett Rose and Siddharth Joshi, New York-based strategists at the primary dealer Citigroup Inc., wrote in a note to clients yesterday.
“The recent move has more than accounted for recent Fed accommodation and should reverse unless the Fed takes further steps -- which we do not anticipate in the near term,” the analysts wrote.
The yield on the five-year note has tumbled 1.30 percentage points to 1.45 percent since reaching this year’s high of 2.75 percent in April. Five-year notes have returned investors 8.3 percent since the start of the year, outperforming the 7.6 return in the broader Treasury market, according to Bank of America Merrill Lynch indexes.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net
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