Treasury 30-year bond yields approached the lowest level this year as Asian stocks declined amid concern China will further tighten monetary policy to slow growth, boosting demand for the relative safety of U.S. debt.
Investors cut bets on inflation for a fifth week, the longest run since credit markets froze in October 2008, yields indicate. Fidelity Investments, the fund company that oversees $1.64 trillion, said Treasuries should be a “core component” of investor portfolios as inflation is low. The U.S. will today sell $16 billion of 30-year bonds, the securities most sensitive to costs in the economy because of their long maturity.
“Treasuries are supported by the general market angst about falling equities and concern over the U.S. economy,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Today’s 30-year auction will be a reasonable test for the markets, given the low yield levels we’re at.”
Thirty-year bonds yielded 4.29 percent as of 10:22 a.m. in London, according to Bloomberg Bond Trader prices. The 4.75 percent security due in February 2041 rose 6/32, or $1.88 per $1,000 face amount to 107 20/32. The yield fell five basis points yesterday. It reached 4.25 percent on May 5, the lowest since Dec. 7.
The 10-year note yield was at 3.18 percent. It fell to 3.13 percent on May 6, the least since Dec. 8.
The MSCI Asia Pacific Index of shares declined 1.5 percent, snapping a three-day gain. Futures contracts on the Standard and Poor’s 500 Index slipped 0.5 percent, extending yesterday’s 1.1 percent drop.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, shrank to 2.42 percentage points from 2.67 percentage points on April 11, the widest in three years.
A five-week narrowing in the spread would be the longest since the global recession of 2008 caused inflation expectations to plunge.
Treasury yields may stay low because inflation is in check, according to Boston-based Fidelity.
Investors who are “neutral” on U.S. debt should have about 30 percent of their bond portfolio in Treasuries, Claus te Wildt, a senior vice president and researcher at the company, wrote in a report yesterday on its website. The recommendation contrasts with Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, and is betting against America’s sovereign debt.
“Everybody seems to dislike U.S. Treasuries right now,” te Wildt wrote. “Interest rates could stay low for quite some time due to a lack of inflation. Treasuries should remain a core component of a diversified portfolio.”
Chinese Wealth Fund
Consumer prices in China rose 5.3 percent from a year earlier and banks extended 740 billion yuan ($114 billion) of local-currency loans, according to reports yesterday from the statistics bureau and central bank.
Inflation is “the most pressing problem” facing the world’s second-biggest economy, Vice Premier Wang Qishan said this week. Monetary policy will remain “prudent” and focus on removing “inflationary monetary elements,” Chinese officials said in a statement in Washington after talks with the U.S.
Treasuries are a safe investment, Lawrence Lau, chairman of CIC International (Hong Kong) Co., China’s sovereign wealth fund, said at a briefing in Beijing today. China is America’s largest creditor, holding $1.15 trillion of the $9.14 trillion in publicly traded debt.
The 30-year Treasuries being sold today yielded 4.31 percent in pre-auction trading, compared with 4.531 percent at the previous offering on April 14.
Investors bid for 2.83 times the amount of debt offered last month, versus an average of 2.7 for the past 10 sales. Indirect bidders, the investor group that includes foreign central banks, bought 47.2 percent, versus the 10-auction average of 40.9 percent.
The Treasury auctioned $24 billion of 10-year notes yesterday and $32 billion of three-year debt the day before. This week’s sales all raise new cash rather than replacing maturing securities.
The U.S. economy is strong enough to send 10-year yields to at least 5 percent in the years ahead, Torsten Slok and Peter Hooper, economists at Deutsche Bank Securities Inc. in New York, wrote in a report yesterday.
The Federal Reserve will raise its target for overnight bank lending to 4 percent in the next few years, from the current rage of zero to 0.25 percent, according to Deutsche Bank, one of the 20 primary dealers authorized to trade directly with the central bank.
Retail sales climbed 0.6 percent in April, following a 0.4 percent increase in March, based on a Bloomberg News survey before the Commerce Department report today. Other data will show fewer workers filed claims for jobless benefits, and producer prices rose, according to separate surveys.
The 10-year yield will rise to 3.91 percent by year-end, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.
U.S. debt posted the best returns in eight months in April, gaining 1.15 percent, according to Bank of America Merrill Lynch indexes. Treasuries have returned 0.71 percent so far in May.