Treasuries Gain as Yields Surpassing Inflation Attract
Treasuries gained after benchmark 10-year rates rose to surpass the pace of inflation yesterday, offering a so-called positive real yield for the first time in 14 months.
Ten-year rates climbed as high as 1.73 percent, versus the 1.7 percent level of consumer-price increases in the U.S. Treasuries have lagged behind inflation since May 2011, leading Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., to warn that it is a form of “financial repression.” Signs of waning growth worldwide including a slowdown in Chinese exports are bolstering demand for the safety of U.S. government securities.
“The real interest rate is becoming more attractive,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “The world economy is shrinking, and that means investors would like to buy bonds.”
Benchmark 10-year yields declined four basis points to 1.65 percent as of 6:46 a.m. in London today from yesterday’s closing level, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 advanced 11/32, or $3.44 per $1,000 face amount, to 99 3/4. A basis point is 0.01 percentage point.
Japan’s 10-year rate slid 1/2 basis point to 0.795 percent, falling for the first time this week.
U.S. consumer price gains probably slowed to 1.5 percent in July from the year before, versus June’s 1.7 percent reading, according to a Bloomberg News survey of economists before the Labor Department reports the data on Aug. 15. The figure would translate into a 10-year real yield of 16 basis points, climbing from negative 2.11 percentage points in October.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.29 percentage points. The average over the past decade is 2.15 percentage points.
Gross wrote in his July outlook that investors are in an era where “negative real rates on Treasuries and its incumbent financial repression dominate bond and asset markets.”
Today’s gain in Treasuries interrupted a decline that has sent prices down for three weeks, the longest run since February, as signs of improvement in the U.S. labor market increased demand for higher-yielding assets.
The economy added 163,000 jobs in July, a government report showed Aug. 3, more than the 100,000 projected by economists. Initial claims for unemployment insurance unexpectedly dropped by 6,000 to 361,000 in the week ended Aug. 4, a report showed yesterday.
Demand waned at sales of 3-, 10- and 30-year Treasuries this week. The 10-year auction on Aug. 8 drew bids for 2.49 times the amount of debt available, dropping from 3.61 at the prior auction on July 11.
“Many investors saw the employment data and stopped buying,” said Hiromasa Nakamura, who invests in Treasuries in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $41.9 billion and is part of Japan’s third-biggest bank. “All three auctions were weak.”
Corporate bonds outperformed government debt as investors sought higher rates while 10-year Treasury yields fell to a record low of 1.38 percent on July 25.
U.S. government securities have returned 1.9 percent in 2012 as of yesterday, versus 7.7 percent for an index of investment-grade and high-yield company debt, according to Bank of America Merrill Lynch data. The MSCI All-Country World Index (MXWD) of stocks handed investors a 10 percent gain including reinvested dividends, according to data compiled by Bloomberg.
Investors are willing to accept 2.67 percentage points of extra yield to own company debt instead of Treasuries, versus 3.48 percentage points at the end of last year, based on the Bank of America data.
Gross cut the proportion of Treasury debt in Pimco’s $263 billion Total Return Fund to 33 percent of assets last month from 35 percent in July, according to a report on the Newport Beach, California, company’s website yesterday. Mortgages comprised 51 percent, from 52 percent. Holdings of bonds in developed markets outside the U.S. rose to 6 percent from 5 percent.
Signs of slowing economic growth around the world are supporting bonds today, CIBC’s Oh’e said.
Japan’s gross domestic product probably expanded at an annual pace of 2.3 percent in the second quarter, half the rate of the prior three months, a Bloomberg News survey of economists showed. The Cabinet Office will release the figure on Aug. 13.
The Federal Reserve plans to sell as much as $8 billion of Treasuries maturing from July 2013 to January 2014 today, according to the website of its New York branch. The sales are part of the central bank’s effort to support the economy by swapping shorter-term Treasuries in its holdings with those due in six to 30 years, putting downward pressure on long-term borrowing costs.
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