U.S. 5- to 10-Year Yield Gap Widens on Fed Forecasts; Fidelity Likes TIPS

The difference between U.S. five-and 10-year yields widened to the most in almost three months after the Federal Reserve said yesterday it plans to keep its target for overnight bank lending low through late 2014.

The spread increased to as much as 1.21 percentage points, the most since Oct. 28. The central bank said it will extend its low-rate pledge from the middle of 2013, sending five-year rates to a record low yesterday. Longer-term Treasuries lagged behind on concern efforts to spur the economy will lead to inflation in the years ahead. Fidelity Investments, the Boston-based fund company that oversees $1.52 trillion, is favoring Treasury Inflation Protected Securities.

“By keeping rates low for a longer period, beyond two years, the five-year will benefit most,” said Bin Gao, head of rate research for Asia and the Pacific at Bank of America Merrill Lynch in Hong Kong. “It increases the inflation risk, so 10-years will not rally that much.” The company is one of the 21 primary dealers that trade with the Fed.

Benchmark 10-year yields declined one basis point, or 0.01 percentage point, to 1.98 percent as of 11:26 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 rose 3/32, or 94 cents per face amount, to 100 1/8.

Five-year yields slid one basis point from yesterday’s closing level to 0.80 percent. The record low yesterday was 0.76 percent.

The Treasury Department is scheduled to sell $29 billion of seven-year securities today.

Bond Buying

Policy makers are “prepared to provide further monetary accommodation” and bond buying is “an option that’s certainly on the table,” Fed Chairman Ben S. Bernanke said after officials gathered for a meeting yesterday.

Shorter-term Treasuries tend to track what the central bank does with its target for overnight lending, while longer maturities are more influenced by the inflation outlook.

The difference between yields on 10-year notes and 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 was one basis point away from the 10-year average.

In a separate statement of its long-range goals and strategy, the Fed specified a 2 percent goal for inflation, as measured by the annual change in the price index for personal consumption expenditures.

“I have preferred Treasury Inflation Protected Securities to regular Treasuries recently,” Bill Irving, the manager of the $5.48 billion Fidelity Government Income Fund (FGOVX), wrote in a report on the company’s website yesterday. “Given how accommodative the Fed has been, and given the possibility that the economy’s strength could surprise to the upside, I think the inflation protection TIPS can offer is worth considering.”

The fund returned 7.6 percent in the past year, beating 55 percent of its competitors, according to data compiled by Bloomberg.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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