It Sounds Crazy. Oil Is Safer Than Treasuries for This Investor

Defend Dividends in the Oil Sector
  • Ten-year notes will lose about 3% by June 30, survey shows
  • `The commodity maket has corrected already': Meritz's Park

Oil is a better bet than Treasuries as the Federal Reserve contemplates raising interest rates, according to Park Sungjin, an investor in Seoul.

While the Fed probably won’t act as soon as Wednesday when it concludes a policy meeting, U.S. interest rates may head higher in the coming months, said Park, the head of investment management at Meritz Securities Co., which has $7 billion in assets. West Texas Intermediate crude oil is attractive following a 47 percent plunge over the past year, according to Park.

“Where should we look for the safe havens?” Park said. “It sounds crazy, but I think the commodity market is much better than any other, including Treasuries. The Fed is ready to raise rates, the commodity market has corrected already: I’m buying. We have a long position on commodities, especially WTI. You have to use energy.”

Park isn’t alone. Crude oil will rally about 10 percent to $47.34 a barrel by the middle of next year, according to the Bloomberg surveys of economists. The backing of the U.S. government won’t be enough to protect Treasuries as the central bank increases rates, based on the responses. Investors in benchmark 10-year Treasury notes will lose about 3 percent after accounting for reinvested interest, the surveys show.

Benchmark U.S. 10-year note yields were little changed at 2.03 percent as of 9:18 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 was 99 21/32. The yield will climb to 2.59 percent by June 30, the Bloomberg surveys show. Crude oil traded at $43.77 a barrel.

Jim Rogers, the investor and author of the book “Hot Commodities,” said earlier this month that he couldn’t be sure oil is ready to rebound. “Whether we’re at a turning point or not, I don’t know yet, and I’m watching this very closely,” he said Oct. 1.

Hideaki Kuriki, a portfolio manager at Sumitomo Mitsui Trust Asset Management in Tokyo, said he’s betting Treasury yields will have trouble pushing higher thanks to none other than the plunge in oil prices. “Crude price is at a very low level,” he said. “That’s downside pressure for inflation.”

Ten-year yields will be in a range of 2 percent to 2.25 percent through year-end, Kuriki said. He sees oil trading from $40 to $50 a barrel. Sumitomo Mitsui Trust Asset has $55 billion in assets.

Even as signs of slowing economic growth take pressure off the Fed to move, Treasury yields still aren’t high enough, according to Meritz’s Park, who said he’s avoiding U.S. debt.

The probability the U.S. central bank will increase the benchmark by its December policy meeting is 33 percent, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current zero to 0.25 percent target range. The odds of an increase by the end of 2016 are 90 percent.

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