Treasuries Drop on Outlook in Worst Quarter Since 2010
Treasuries had their worst quarter since the last three months of 2010 while corporate bonds surged as the world’s largest economy showed signs of improvement.
U.S. government securities lost 1 percent from the start of the year to March 29, Bank of America Merrill Lynch indexes show. An index of investment-grade and high-yield corporate bonds returned 3.2 percent, the most since the third quarter of 2010. Treasuries also trailed German debt, while stocks surged. U.S. payrolls added more than 200,000 jobs for a fourth month in March, the longest such run since 2000, data next week may show.
“Our economy is gaining traction,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “If you think things are getting better, you’re not supposed to buy 10-year notes with 2 percent yields.”
Benchmark 10-year note yields climbed 33 basis points, or 0.33 percentage point, from the end of 2011 to 2.21 percent yesterday in New York, according to Bloomberg Bond Trader prices. They reached 2.40 percent on March 20, the highest level since Oct. 28, a week after the Federal Reserve upgraded its assessment of the U.S. economy. They had touched a record low 1.67 percent in September. The average over the past decade is 3.86 percent.
Ten-year yields will increase to 2.54 percent by year-end, according to the average forecast in a Bloomberg News survey of 77 financial companies, with the most recent projections given the heaviest weightings.
Thirty-year bond yields rose 44 basis points from January through March to 3.34 percent.
Stocks rallied as data showing U.S. economic improvement fueled risk appetite. The Standard & Poor’s 500 Index had its biggest first-quarter advance since 1998, gaining 12 percent.
The U.S. economy grew at a 3 percent annual rate in the last three months of 2011, the same as previously estimated, revised figures from the Commerce Department showed on March 29. It gained at a 1.8 percent pace in the prior quarter. Consumer spending rose by 0.8 percent in February, the most in seven months, Commerce Department data showed yesterday.
“The U.S. has got some legs, at least for the next couple of quarters,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said yesterday in an interview on Bloomberg Television in Italy. “There remain all sorts of issues, but I think the U.S. is going to continue to positively surprise.”
Employers in the U.S. added 205,000 jobs in March, economists in a Bloomberg News survey forecast before the Labor Department reports the data on April 6. The monthly increase was last below 200,000 in November. It would be the longest stretch above that figure since the five months ended in January 2000.
Treasuries (YCGT0025) fell this month as Greece pushed through the biggest sovereign restructuring in history after getting private investors to forgive more than 100 billion euros ($132 billion) of debt. The move opened the way for a 130 billion-euro bailout package designed to prevent a collapse of the economy.
“Part of the reason yields went up was the better economic numbers,” Maury Harris, chief economist at UBS AG in New York, one of the 21 primary dealers that trade directly with the Fed, said March 28. “But an important part of that was” a decline in the “risk coming out of Europe with the progress that you’ve seen there.”
German (GDBR10) 10-year bunds were little changed this quarter as their haven appeal waned, with yields falling four basis points to 1.79 percent. Treasuries still lagged behind German sovereign debt, which returned 0.2 percent from January through March.
The increase in U.S. yields this year has brought them closer to the annual rate of inflation. Ten-year notes have a so-called real yield of minus 66 basis points, compared with minus 152 basis points at the end of 2011.
The five-year, five-year forward break-even rate, which projects the pace of consumer-price increases starting in 2017, was 2.66 percent on March 28 after reaching 2.78 percent on March 19, the highest level since August.
While the measure, which the Fed prefers to look at in determining inflation expectations and monetary policy, is up from this year’s low of 2.37 percent on March 5, it’s below the 2.72 percent average over the past decade.
Fed Chairman Ben S. Bernanke said this week the economic recovery isn’t assured. Policy makers don’t rule out further options to support growth, he said on March 27, according to a transcript of an ABC News interview provided by the network.
The central bank bought $2.3 trillion of debt under two rounds of quantitative easing from December 2008 to June 2011 to support the economy. It also has kept the benchmark interest rate for overnight loans between banks at zero to 0.25 percent since December 2008 and has pledged to keep it there through most of 2014.
Philadelphia Fed President Charles Plosser said March 29 the central bank may need to raise interest rates before late 2014 and additional stimulus isn’t necessary as the U.S. economy shows signs of strength.
“A lot of people were quick to embrace” the changes suggested by U.S. yields’ climb from March 13 through March 20, Scott Sherman, an interest-rate strategist at the primary dealer Credit Suisse Group AG in New York, said yesterday. “They priced out expectations for additional asset purchases. They also priced forward earlier rate increases.”
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