Can’t Decide How to Bet on U.S. Treasuries? Try Flipping a Coin

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Treasuries Flip Flopping

Can’t decide where Treasuries are headed? The market’s recent performance shows they could go either way.

U.S. government securities have swung between gains and losses for five weeks, based on Bloomberg World Bond Indexes, reflecting uneven growth and Federal Reserve officials who are sending conflicting signals on when they may raise interest rates. Bond yields suggest investors are bracing for a pickup in inflation that never seems to come.

“The economic indicators are temporarily up and down,” said Hiroki Shimazu, a senior market economist at SMBC Nikko Securities Inc. in Tokyo. “The market is confused about Fed policy.”

Benchmark U.S. 10-year yields were little changed at 1.90 percent as of 7:04 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2025 was 100 29/32.

U.S. employers added more than 200,000 jobs in both January and February before hiring dropped to 126,000 in March. Growth in gross domestic product slowed in the first quarter, based on a Bloomberg survey of economists before the report April 29.

Boston Fed President Eric Rosengren said this month the U.S. economy isn’t ready for an interest-rate increase. Speaking on CNBC on April 16, Vice Chairman Stanley Fischer said markets can’t depend on the Fed staying on hold forever.

Inflation Outlook

Traders see inflation averaging 1.7 percent a year in the next five years, based on a metric known as the break-even rate. That’s a half-percentage point higher than the gauge showed at the end of 2014.

The current inflation rate is just 0.3 percent, based on an index the Fed monitors.

George Goncalves, head of interest-rate strategy at Nomura Holdings Inc. in New York, said the investors he contacted in the past week are trying to find a trend.

“The overall mood was one of lower conviction as investors seem to be increasingly tired of the ups and downs of U.S. growth patterns,” he wrote in a report April 24. “Most still think rates are too low but had a long list why they don’t see a major sell-off in the making just yet.”

SMBC Nikko’s Shimazu offered a theory for the confusion: the unexpectedly harsh U.S. winter slowed the world’s biggest economy. And it’s not over yet. As recently as Sunday, the weather forecast for Syracuse, New York, said there was a chance of snow showers.

So until winter gives way to spring -- and a trend emerges for Treasuries -- flipping a coin may well be the best way to bet on the world’s biggest bond market.

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