The outstanding amount of zero-coupon U.S. Treasury notes and bonds rose to the highest level in 14 years last month as buyers seek to lock in higher returns with interest rates falling and stocks close to record highs.
Zero-coupon debt, or strips, short for separate trading of registered interest and principal securities, is created by Wall Street firms that split bonds into their face amount and individual coupon payments. The amount of strips rose by $1.58 billion, or 0.8 percent, to $208.6 billion last month, Treasury Department data released today show. That’s the highest amount since January 2000.
Increased demand for strips indicates U.S. pension funds, which oversee $16 trillion, have redirected cash into fixed-income securities after record profits in the stock market last year, according to Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 22 primary dealers that are required to bid on Treasury auctions.
“They are buying these strips even with little regard to yield because they want to de-risk,” Sun said. ‘They moved out of equities and into long-duration assets and they are doing it not because of yields, but because of de-risking.’’
Thirty-year strips returned 12.2 percent this year, almost double the 6.2 percent gain for the Treasury bond due in February 2044, according to Bank of America Merrill Lynch index data. The yield on strips maturing February 2044 was at 3.9 percent, the highest since Feb. 24.
“As long as rates remain in this neighborhood, the principal strips will continue to look attractive and stripping activity will continue to remain robust,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer.