Treasury Yield Near 17-Month Low on Speculation Fed May Increase Purchases
President of the Fed Bank of St. Louis James Bullard
Tomohiro Ohsumi/Bloomberg
President of the Fed Bank of St. Louis James Bullard said the central bank may need to buy more if inflation keeps slowing.
President of the Fed Bank of St. Louis James Bullard said the central bank may need to buy more if inflation keeps slowing. Photographer: Tomohiro Ohsumi/Bloomberg
Aug. 18 (Bloomberg) -- Christian Gattiker, head of research at Bank Julius Baer & Co., talks about his investment strategy for stocks versus bonds. He speaks from Zurich with Maryam Nemazee on Bloomberg Television's "Start Up." (Source: Bloomberg)
Aug. 17 (Bloomberg) -- Mitchell Stapley, chief fixed-income officer for Fifth Third Asset Management, talks with Bloomberg's Julie Hyman about the outlook for fixed income markets and Federal Reserve policy. Stapley says he doesn't see the Fed raising rates until 2011. (Source: Bloomberg)
Treasury 10-year yields were near a 17-month low after Federal Reserve Bank of St. Louis President James Bullard said the central bank may need to buy more Treasuries if inflation continues to slow.
The Fed plans to buy Treasuries due from August 2016 to August 2020 tomorrow, after purchasing $2.551 billion of securities yesterday, to hold borrowing costs down. There has been “disinflation,” Bullard, who votes on monetary policy this year, told the Wall Street Journal yesterday. “We should have a plan in place to take action if it moves lower.” German 30-year bond yields reached a record low and Japanese 10-year yields dropped to their lowest in seven years.
“There is still concern on the strength of the recovery, and the risk is that the Fed will expand its balance sheet with further purchases, and that’s giving Treasuries support,” said Orlando Green, assistant director of capital markets strategy at Credit Agricole Corporate & Investment Bank in London.
The 10-year note yield fell three basis points to 2.61 percent as of 10:35 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due August 2020 rose 1/4, or $2.50 per $1,000 face amount, to 100 1/8. Yields dropped to 2.56 percent on Aug. 16, the lowest since March 2009.
Two-year yields were little changed at 0.51 percent, while 30-year yields were three basis points lower at 3.75 percent. Ten-year rates may end 2010 at 3 percent, according to Green.
German 30-year yields fell as low as 2.978 percent, according to Bloomberg generic data, while Japanese 10-year yields dropped to 0.916 percent.
Bond Buying
The central bank announced its buying plans on Aug. 10, saying it would make the purchases using funds from principal payments of its holdings of mortgage-backed debt.
U.S. consumer prices excluding food and energy rose 0.9 percent in July from the year before, holding at the lowest level in four decades. Disinflation is a slowing of inflation.
An index of global sovereign bonds has returned 5.7 percent this year, according to Bank of America Merrill Lynch. MSCI’s World Index of shares handed investors a 2.4 percent loss after accounting for reinvested dividends.
Bonds will continue to rally as individual investors no longer trust equities, according to Christian Gattiker, head of research at Bank Julius Baer & Co. Ltd. in Zurich.
‘Bond Bubble’
“I don’t expect we are at the peak of the bond bubble,” he said on Start Up with Maryam Nemazee on Bloomberg Television today. “The baby-boomer generation is, after being hurt twice with equities, and having a shorter investment time horizon, simply buying bonds like there’s no tomorrow, and yields may stay low for the next two to three years.”
Most forecasters say Treasury yields will climb by year- end. Ten-year rates will increase to 3.17 percent, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.
Mitchell Stapley, who oversees $22 billion as chief fixed- income officer for Fifth Third Asset Management, said he is seeking higher yields in asset-backed debt and commercial- mortgage-backed securities.
“Those have been two places we can go besides the corporate bond market to put some money to work” given the “princely 50 basis points” yielded by two-year treasuries, he said on Bloomberg Television yesterday.
Treasury Alternatives
An index of asset-backed and commercial-mortgage-backed bonds yielded 2.43 percentage points more than Treasuries, narrowing about 1 percentage point this year, according to Bank of America Merrill Lynch.
Investor bets that yields will fall are showing up in the swaps market, where money managers are locking in fixed 30-year rates, said Tomohisa Fujiki, a bond strategist at BNP Paribas Securities Japan Ltd. in Tokyo. The company’s U.S. arm is one of the 18 primary dealers that are required to bid at the government debt sales.
The 30-year swap rate was 39 basis points less than the Treasury yield today, after reaching negative 46 basis points on Aug. 16, which was the least since April 2009.
In a swap, investors exchange fixed and floating interest rates. The spread is the difference between the fixed rate and the yield on same-maturity Treasuries.
The figure is usually positive because investors assign higher risk to transactions conducted by banks than to the U.S. government. It has averaged 27 basis points for the past five years.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
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