Treasuries rose for the first time in six days as a collapse in China’s export growth added to signs the global economy is weakening and pushed investors toward safer assets.
Benchmark 10-year yields climbed above the rate of inflation yesterday, luring investors seeking so-called positive real yields. China’s exports increased 1 percent in July from the year before, versus 11.3 percent in June, while French industrial output stagnated, reports today showed. The Federal Reserve will sell as much as $8 billion of short-maturity Treasuries today as part of its Operation Twist program.
“Today’s move in Treasuries is all down to disappointment over the Chinese data and worries about global growth,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The data is the primary driver today for gilts, bunds and Treasuries.”
The benchmark 10-year yield dropped four basis points, or 0.04 percentage point, to 1.65 percent at 7:28 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 rose 13/32, or $4.06 per $1,000 face amount, to 99 26/32.
The 10-year yield climbed as high as 1.73 percent yesterday, surpassing the 1.7 percent level of U.S. consumer-price increases. Treasuries have lagged behind inflation for 14 months, leading Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co., to say it is a form of “financial repression.”
U.S. consumer-price inflation slowed to 1.5 percent in July from a year earlier, versus June’s 1.7 percent reading, according to a Bloomberg survey before the Labor Department report on Aug. 15. The figure would translate into a real yield of 15 basis points, based on today’s 10-year rate. It was negative 2.11 percentage points in October.
“The real interest rate is becoming more attractive,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc.in Tokyo. “The world economy is shrinking, and that means investors would like to buy bonds.” Signs of slowing economic growth around the world are supporting bonds today, Oh’e said.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.28 percentage points. The average over the past decade is 2.16 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.”
The 10-year yield may extend declines to test its 55-day moving average of 1.57 percent, according to Commerzbank AG.
“It is even possible that the 1.44 percent current August low and the 1.435 percent June trough are to be revisited before the yield rises in earnest,” technical analysts including Karen Jones in London, wrote in a note.
Treasuries were still poised for a third weekly decline 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 last week, a report showed yesterday.
The benchmark 10-year yield has increased eight basis points this week.
Demand waned at sales of three-, 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 sale 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 yields.
U.S. government securities have returned 1.9 percent this year 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 of stocks handed investors a 10 percent gain including reinvested dividends, according to data compiled by Bloomberg.
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 of the U.S. increased to 6 percent from 5 percent.
The Fed plans to sell as much as $8 billion of notes due 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 for longer-maturity ones to cap long-term borrowing costs.