Treasury Bull Market Death Knell Premature, Higgins Says
Treasury yields may pare their recent gains after the U.S. government bond market’s worst quarter in more than a year amid continued Federal Reserve market intervention and a slow economic recovery, according to Standish Mellon Asset Management Co.’s Tom Higgins.
Talk of the 30-year-old bull market’s end is “premature” because benchmark 10-year note yields may head lower before they settle into a higher trading range of 2.25 percent to 3 percent by the end of 2012, Higgins, global macro strategist in Boston at the firm, said in a phone interview. At 3 percent, yields would still be lower than the decade average of 3.86 percent.
Yields rose last week to 2.40 percent, the highest level since October, after the Fed raised its assessment of the economy at its March 13 meeting, prompting traders to unwind bets on more monetary stimulus by the central bank in the form of debt buying. The central bank reiterated its commitment to holding the target lending rate at zero to 0.25 percent at least until late 2014 to support the recovery.
“The continued weak backdrop in the economy, the deleveraging environment we are still in, regulation that favors less risky assets and the continued presence of the Fed will continue to anchor rates at lower levels,” said Higgins, whose firm oversees $85 billion in fixed-income assets.
Yields on 10-year notes dropped two basis points, or 0.02 percentage point, to 2.17 percent at 11:57 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in February 2022 advanced 5/32, or $1.56 per $1,000 face amount, to 98 17/32.
Treasuries have lost 1.2 percent so far this year in what would be their biggest quarterly decline since the end of 2010, according to Bank of America Merrill Lynch indexes. The drop comes after U.S. government debt returned 9.79 percent last year, the most since 2008.
Fed Chairman Ben S. Bernanke, who cited “green shoots” of recovery in the U.S. in March 2009 only to see the U.S. jobless rate reach 10 percent seven months later, said yesterday in text of an interview with ABC’s Diane Sawyer that “it’s far too early to declare victory” regarding the economy.
After buying $2.3 trillion of assets to support the economy in two rounds of quantitative easing from December 2008 to June 2011, the central bank has been replacing shorter maturities in its holdings with longer-term debt to cap borrowing costs without increasing its balance sheet. The $400 billion program, known as Operation Twist, is due to end in June.
Lenders will have to continue adding Treasuries to meet new reserve rules under the Dodd-Frank financial-overhaul law and Basel III regulations set by the Bank for International Settlements in Basel, Switzerland.
“It’s very premature to claim that the bear market in bonds has arrived,” Higgins said. “We’ve seen run-ups in yields flame out before, and we will continue to see that unless there is major headway on the economic front.”
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