Treasuries are paying the smallest yield in two years compared with U.S. corporate bonds as investors seek the safest securities and shun the riskier ones.
The extra yield investment-grade company debt provides over government securities climbed to 160 basis points this week, the most since July 2013, based on Bloomberg World Bond Indexes. A spread beyond 165 would be the widest in almost three years. The Federal Reserve will hold its main interest rate near zero after a two-day meeting ends Wednesday, based on a Bloomberg survey of economists.
Turmoil in China and Greece along with tumbling commodity prices are driving investors to the most secure assets. That has led Treasuries, the classic low-risk investment because of their high credit rating and liquidity, to beat their rivals in the bond market over the past year.
“Risk-off sentiment prevails in the world market,” said Toshifumi Sugimoto, the chief investment officer at Capital Asset Management in Tokyo. “There’s a flight to quality.”
The benchmark U.S. 10-year note yield was little changed at 2.25 percent as of 6:48 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.125 percent security due in May 2025 was 98 7/8.
U.S. government securities have returned 3.2 percent in the past 12 months, based on the Bloomberg World Bond Indexes. Investment-grade company bonds in the nation gained 0.7 percent, and high-yield debt declined 1.7 percent.
Verizon Communications Inc.’s bonds due in 2023 returned 2.8 percent including interest in the past year, versus 4.5 percent for same-maturity Treasuries, data compiled by Bloomberg show.
Apple Inc.’s bonds maturing the same year gained about 3 percent, compared with more than 4 percent for comparable U.S. notes, the data show.
The Verizon security has the biggest weighting in the Bloomberg U.S. Corporate Bond Index. The Apple bonds are ranked ninth.
Investors are seeking a haven as Chinese stocks tumble. The Shanghai Composite Index has fallen 28 percent after including reinvested dividends from its June 12 peak.
The Bloomberg Commodity Index has dropped 28 percent in the past year. Greece is in talks with creditors for a bailout loan.
Treasuries are drawing haven investors with their top-level debt ranks assigned by Moody’s Investors Service and Fitch Ratings. They are labeled one step lower by Standard & Poor’s. At $12.9 trillion, the U.S. has the world’s biggest debt market.
The rally won’t last as the Fed raises interest rates, judging by Bloomberg surveys of economists. While the chance of a central bank move Wednesday is just 6 percent, the odds rise to 69 percent in December, based on futures trading.
That means today’s haven bonds may turn into some of the riskiest as low yields offer scant protection against rising interest rates.