Treasuries Are the Worst Investment, Except for All Others

  • U.S. 10-year yields fall more than G-7 peers in past month
  • Short-term Treasury ETFs lure cash from skittish investors

Treasuries are cementing their status as the world’s market oasis of choice -- at least for investors who aren’t stashing their money under the mattress.

Even though the Federal Reserve may be on the cusp of raising interest rates, 10-year Treasuries outpaced their Group of Seven peers during the August equities swoon. The performance is a change from the lead-up to the three Fed rate-boosting cycles since 1993, when 10-year U.S. debt tended to trail its counterparts from other developed countries.

U.S. notes started last month yielding one percentage point above the average of the six other G-7 members. The gap shrank to 0.83 percentage point at the height of the market tumult, and remains narrower than it was on July 31. That’s even after the European Central Bank signaled Thursday that it may expand its bond buying, and a jobs report Friday prompted traders to bet on a higher chance of a September liftoff by the Fed. The likelihood of a rate increase this month rose to 36 percent, from 26 percent before the report, according to Bloomberg data, assuming the fed funds rate averages 0.375 percent after the first increase.

That shows investors seeking safety are making Treasuries their top destination, and that they expect U.S. inflation to remain tame and the Fed to move gradually.

"Treasuries seem to be a little bit more risk-free at the moment than normal," said David Keeble, New York-based head of fixed-income strategy with Credit Agricole SA. Rather than a broad rotation into global government debt, “money is coming here.”

That’s because during the slide in stocks, other traditional havens have looked even worse. Gold is off more than 5 percent this year. And with many central banks cutting interest rates and adding stimulus, U.S. 10-year notes yield more than benchmark obligations of 17 other developed economies. That makes longer-dated Treasuries one of the best options for investors seeking both safety and yield.

For buyers focusing mainly on capital preservation, short-maturity U.S. government securities have been the primary choice, said John Briggs, head of strategy for the Americas at RBS Securities Inc. in Stamford, Connecticut. Yields on the maturities may not reflect that demand, because of selling pressure from China and the looming Fed move, he said.

ETF Signal

Yet fund data indicate investors are piling in. The $12.5 billion iShares 1-3 Year Treasury Bond ETF brought in $924 million in the week through Wednesday, more than all but one U.S.-listed exchange-traded fund, according to data compiled by Bloomberg.

The SPDR Barclays 1-3 Month T-Bill ETF ranked third, bringing in $845 million.

The prospect of a dollar rally after the Fed’s first interest-rate increase since 2006 is another reason for U.S. investors to shun international debt and favor Treasuries.

A stronger greenback would diminish the value of interest earned abroad, deterring U.S. investors from looking to international bond markets, said Jay Mueller, a senior portfolio manager helping oversee $3.5 billion for Wells Capital Management Inc. in Menomonee Falls, Wisconsin.

"A little bit of currency movement can wipe out a fair amount of yield" in global debt, he said.

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