Treasuries investors reeling from a rout in April may do well to heed the adage “sell in May and go away.”
The worst could be ahead for U.S. government debt after speculation the Federal Reserve remains on track to raise interest rates this year sparked the first April loss since at least 2009. Even after the decline, Treasuries look unappealing relative to global peers: the yield advantage over German bunds is near a one-month low, while Australian debt offers its biggest premium in nearly three months.
“I don’t think Treasuries are good value, particularly when the Fed still looks open to raising rates in the next few months,” said Janu Chan, an economist at St. George Bank Ltd. in Sydney. “The trend is still for U.S. yields to edge higher and bonds to continue selling off.”
The Treasury 10-year yield rose two basis points, or 0.02 percentage point, to 2.05 percent as of 6:35 a.m. in London, after jumping to as high as 2.11 percent for the first time since March 13 on Thursday, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent note due in February 2025 was 99 17/32.
The U.S. 10-year yield climbed 11 basis points in April as the Treasury market suffered its first loss for the month, according to a Bloomberg index dating back to 2010. The only decline for the month of May was a 2 percent slide in 2013.
The yield will rise to 2.08 percent by the end of June, and
2.45 percent by the end of the year, according to the weighted average of analyst estimates in a Bloomberg survey.
In a statement after a two-day meeting ended on Wednesday, Fed Chair Janet Yellen and her colleagues reiterated their belief that growth will pick up to a “moderate pace.” Policy makers also repeated that they will raise interest rates when there’s evidence of further improvement in job creation and they are “reasonably confident” that inflation will quicken back toward their 2 percent goal.
Government reports on Thursday showed first-time filings for unemployment insurance fell to the lowest in 15 years, while consumer purchases rose by the most since November.
“U.S. yields should drift higher through the month as expectations for a Fed rate hike firm up,” said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd., the nation’s largest lender by assets. “If we get a decent run of economic data, then the September meeting comes straight back into focus.”
In Australia, receding investor expectations of a rate cut pushed the premium on the country’s sovereign debt over Treasuries to 63 basis points on Friday, from as low as 34 basis points on March 26, which was the least since 2001.
In Europe, concerns about Greece helped drive up German 10-year bund yields by 19 basis points last month, compressing the extra yield that investors get for holding similar-maturity Treasuries to 167 basis points as of Thursday. The gap was 184 basis points as recently as April 28.
“I didn’t like this whole selloff, but with the bund getting whacked, it’s likely here to stay for a little bit,” said Aaron Kohli, an interest-rate strategist with BNP Paribas SA in New York.