Nomura Sees Treasuries in Vogue as T. Rowe Says Heed Warnings

Nomura Holdings Inc. says it’s turning bullish on long-term Treasuries.

T. Rowe Price Group Inc. says now’s the time to pay attention to warnings the Federal Reserve is about to raise interest rates and send bond prices down.

U.S. government securities are “back in vogue,” Nomura analysts wrote in a report dated July 17. The central bank probably won’t raise interest rates until December, and inflation is poised to slow, according to the firm, whose New York unit is one of the 22 primary dealers that trade directly with the Fed.

Analysts at the two companies differ as the Fed prepares to increase U.S. borrowing costs for the first time since 2006 amid uneven growth in the world’s largest economy. While central bank Chair Janet Yellen says she expects to increase the benchmark rate before year-end, Charles Evans, president of the Fed Bank of Chicago, is calling for the middle of 2016. Treasuries have swung between gains and losses this year, leaving them little changed for 2015, data compiled by Bloomberg show.

Nomura says it’s expecting a “grind lower” in U.S. long-term yields during the summer, analysts George Goncalves, Stanley Sun and Tracy Jin in New York wrote in their report.

Benchmark 10-year yields may fall toward 2 percent, according to Nomura, from 2.33 percent as of 6:21 a.m. Wednesday in London.

Stay Underinvested

Nomura ruled out a Fed rate increase as soon as September and said it was more likely later in the year. “Staying underinvested fixed income until then comes with opportunity costs,” the analysts wrote in the report.

What’s more, the U.S. inflation rate is probably peaking for 2015, they said. Inflation erodes the value of a bond’s fixed payments.

According to the Fed’s preferred inflation measure, consumer prices rose 0.2 percent in May from the year before. This year’s high is just 0.3 percent, and the gauge has been less than the central bank’s 2 percent target for three years.

Yellen said this month the Fed won’t wait until inflation reaches its goal to act. She reiterated she expects to move this year and the pace of increases will be gradual.

Evans said in July low inflation was one of the reasons he thinks policy makers should keep rates on hold. While the jobless rate is at a seven-year low of 5.3 percent, retail sales have fallen in three out of six months this year, reflecting the uneven pace of growth.

Turning Tide

T. Rowe Price, the Baltimore-based money manager with $773 billion in assets, says warnings on bond losses have mostly turned out to be false alarms. “However, the tide may be turning,” it said in a report on its website Tuesday.

Andrew McCormick, head of the company’s U.S. taxable bond team, said investors should prepare for the Fed to act. Higher central bank rates can make bond yields relatively less attractive and send the prices of the securities down.

“We expect to see upward pressure on rates and increased volatility as tightening becomes more certain,” McCormick wrote in his report. “And low yields in many sectors provide less cushion against rising rates.”

Investors shouldn’t abandon their bonds just yet, though, he wrote.

“As rates are rising, fund managers are able to reinvest coupon payments, as well as principal from maturing securities, into new bonds offering higher yields,” according to McCormick. “The power of compound interest increases income over time and boosts returns once rates stabilize at higher levels.”

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