Treasury two-year yields of just 0.72 percent are low historically, yet they’re looking better and better compared with the alternatives. Pacific Investment Management Co. says the result will be a stronger dollar.
The U.S. yield is almost 1 percentage point more than more than its German counterpart, which is minus 0.25 percent. The premium reached the most since 2007 this week. German securities serve as benchmark debt for the euro area. Against Japan, the spread was as much as 73 basis points, or 0.73 percentage point, on Aug. 4, the widest this year.
Two-year yields, which are among the most sensitive to what the Federal Reserve does with its main interest rate, are climbing as the central bank prepares to increase its benchmark before year-end. The monthly U.S. employment report Friday will show gains in both jobs and wages, based on a Bloomberg survey of analysts, supporting the view the economy is healthy enough to withstand higher borrowing costs.
“We would stay long the dollar against the yen and the euro in this climate because the Fed is about to raise interest rates,” Tony Crescenzi a market strategist at Pimco, said in an interview with Bloomberg. “Those nations won’t be raising rates for quite some time.” Pimco, based in Newport Beach, California, runs the $101 billion Total Return Fund, the world’s biggest actively run bond fund.
A long position profits when the asset’s price rises.
The price of the 0.625 percent note due in July 2017 was little changed at 99 26/32 as of 8:44 a.m. in New York, according to Bloomberg Bond Trader data. The yield has risen from this year’s low of 0.40 percent set in January and compares with the 1.63 percent average for the past decade. The benchmark 10-year yield was at 2.27 percent.
The Bloomberg Dollar Spot Index has risen 19 percent in the past year and is close to a record high in data going back to 2004.
The downside of rising Treasury yields is falling prices for money managers who already own the securities. JPMorgan Chase & Co. said investors should reduce their holdings of two-year debt, in a note to clients July 31.
The two-year yield will climb to 1.25 percent by Dec. 31, the company predicted. An investor who bought Thursday would lose about 0.5 percent if the forecast is correct, according to data compiled by Bloomberg.
UniCredit SpA, Italy’s biggest bank, predicts even higher yields, with the rate climbing to 0.90 percent by the end of September and 1.35 percent by year-end.
“If our call for two hikes until the end of the year materialized, this would surely mean most pressure on the front end of the U.S. curve,” said Michael Rottmann, head of fixed-income research at UniCredit in Munich. Short-term yields will rise faster than those on longer-maturity debt “on the back of a solid print in the non-farm payrolls,” he said.
Fed Chair Janet Yellen said in July she expected the central bank to raise its benchmark rate this year, while emphasizing the pace of increases will probably be gradual.
Employers in the U.S. added more than 200,000 jobs for a third month in July, according to Bloomberg surveys of economists. Average hourly earnings increased 2.3 percent from 12 months earlier, matching the fastest pace this year, based on the responses.
Service providers from retailers to real-estate agencies expanded at the fastest pace in a decade, an industry report showed Wednesday.
While the Fed is getting ready to raise rates, central banks in Europe and Japan are buying government bonds to support their economies by putting downward pressure on borrowing costs.
Park Sungjin, head of investment management in Seoul at Meritz Securities Co., said he’s also betting on the dollar. The reason: The yield advantage is “huge.”