Treasuries held their place as the world’s top-performing bonds over the past three months before a U.S. unemployment report that economists said will show the jobless rate is stuck at 8.2 percent.
U.S. government securities due in 10 years and longer returned 9.8 percent in the period, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. The gain was the most among 144 debt indexes after accounting for changes in bond prices and currencies, reflecting demand for Treasuries as a haven from slowing economic growth and a fiscal crisis in Europe.
Benchmark 10-year yields were little changed at 1.47 percent as of 6:42 a.m. in London, according to Bloomberg Bond Trader prices. The record low yield was 1.38 percent set July 25. The price of the 1.75 percent security due in May 2022 was 102 1/2 today.
“We’ve probably seen the bottom in Treasury rates, but we’re still in a low-yield environment,” said Andy Cossor, the Hong Kong-based chief market strategist at DZ Bank AG, Germany’s fourth-largest lender. “The U.S. economy is sluggish.” Ten-year yields will be 1.6 percent in six months, according to the bank.
Japan’s 10-year rate slid four basis points to 0.73 percent, versus 2012’s low of 0.72 percent set in July. A basis point is 0.01 percentage point.
Mohamed El-Erian, the co-chief investment officer at Pacific Investment Management Co., home to the world’s biggest bond fund, said the world economy is suffering its severest slowdown since the global recession that ended in 2009.
“This is a serious, synchronized slowdown,” El-Erian, who is based in Newport Beach, California, said in an interview yesterday.
A U.S. report today will probably show the economy added 100,000 jobs in July, the most since March, while the jobless rate held at 8.2 percent, according to Bloomberg News surveys of economists. Unemployment has been more than 8 percent since February 2009.
Yields that are approaching record lows may erode demand as investors prepare to bid at auctions next week, said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia, one of the 21 primary dealers authorized to deal with the Federal Reserve.
The Treasury Department is scheduled to auction $32 billion of three-year notes, $24 billion of 10-year debt and $16 billion of 30-year bonds over three days starting Aug. 7.
“Yields are too low,” Jalai said. “We have the auctions, and we could see a correction going into next week.”
The term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, shows Treasuries are almost the most expensive ever. The gauge was negative 0.94, versus the record low of negative 1.02 set July 24.
A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The five-year, five-year forward break-even rate, a measure of inflation expectations that the Fed uses to help guide monetary policy, climbed to 2.57 percent as of July 31 from 2.38 percent over three business days. It was the steepest increase in almost two months. The gauge has averaged 2.75 percent over the past decade.
The central bank plans to sell as much as $8 billion of Treasuries due from January 2013 to June 2013 today, according to the Fed Bank of New York’s website. The sales are part of Chairman Ben S. Bernanke’s plan to put downward pressure on borrowing costs by swapping short-term Treasuries in its holdings for longer maturities.
Treasuries climbed yesterday after European Central Bank President Mario Draghi failed to take immediate steps to support the euro region’s economy.
Draghi said there was “severe malfunctioning” in the region’s debt markets, while stopping short of introducing measures to resolve the situation. He spoke after policy makers kept the benchmark interest rate at 0.75 percent.
Demand for German debt as a haven pushed yields on two-year bunds down to negative 0.09 percent yesterday. Investors require 31 basis points of additional yield to buy same-maturity Treasuries, the biggest difference in two years.
Investors trying to increase their yields should consider switching from government bonds to high-quality mortgage-backed securities, supranational bonds or corporate debt, Seamus Mac Gorain, a strategist in London at JPMorgan Chase & Co., wrote in a report yesterday. Investors who can tolerate greater risk may consider high-yield bonds, according to JPMorgan, which is one of the one of the 21 primary dealers that trade directly with the Fed.
An index of U.S. investment-grade and high-yield company debt pays 2.75 percentage points more than Treasuries, according to according to Bank of America Merrill Lynch indexes. Investor appetite for corporate bonds has narrowed the difference from 3.48 percentage points at the end of last year.
It’s still a good idea to buy Treasuries, said John Brynjolfsson, chief investment officer at Armored Wolf LLC, a hedge fund in Irvine, California. “We’re pretty defensive,” he said yesterday on Bloomberg Television’s “Street Smart” with Alix Steel and Adam Johnson.