Treasuries maturing in 3 1/2 to 4 years represent the “sweet spot” in the government bond market because they offer relatively attractive yields and greater protection than longer-maturity debt as yields fluctuate, according to RBS Securities Inc.’s William O’Donnell.
Central banks have been buying the bonds amid expectations that the Federal Reserve will keep interest rates on hold for an “extended” period, O’Donnell, 54, head of U.S. government bond strategy at the unit of Royal Bank of Scotland Plc, said in a television interview on “Surveillance Midday” with Tom Keene.
“The safest place for people to be, and actually this is where we see a lot of central bank inflows, especially in recent days, is in the 3 1/2-to-4-year sector of the curve,” said O’Donnell, whose firm is one of the 20 primary dealers that trade directly with the Fed. “It’s sort of the sweet spot of the Treasury curve, where you get slope and roll-down and carry. It’s a safe place to be, getting a reasonable amount of yield without taking on too much duration risk.”
Efforts by U.S. lawmakers to agree on a debt ceiling will be the “primary focus” of Treasury holders in the next three to six months, said O’Donnell, who expects a deal to be reached.
Treasury Secretary Timothy F. Geithner said this week the U.S. will have three weeks more than previously seen before hitting its borrowing limit, giving the White House and Congress more time for a deal to raise the debt ceiling.
Geithner on Borrowing
The U.S. can borrow until Aug. 2 after reaching the $14.29 trillion limit because of “stronger-than-expected tax receipts” and by taking “extraordinary measures” such as suspending the sale of bonds to finance state and local infrastructure projects, Geithner said in a letter to congressional leaders on May 2.
Yields on benchmark 10-year notes have traded in a range of 3.14 percent to 3.77 percent this year as investors speculated on the pace of the economic recovery and how soon the Fed would begin to withdraw monetary stimulus.
The U.S. central bank aims to complete $600 billion of Treasury purchases under the second round of quantitative easing by the end of June.
Debt investors “see QE2 ending, they see the effects of the payroll tax cuts waning as we go,” O’Donnell said. “As they look forward they see less fiscal stimulus and more fiscal austerity. People are starting to worry about the prospects for second quarter and second half growth.”