- Six-day drop in Treasuries is longest losing run since 2013
- `Very little value in U.S. Treasuries,' says Loomis's Eagan
Loomis Sayles’s Matt Eagan is avoiding Treasuries, as he predicts the Federal Reserve will raise interest rates in December and again in June.
“We see very little value in U.S. Treasuries,” Eagan, a money manager for the Loomis Sayles Bond Fund, which has about $19.3 billion, said at a media round table in Tokyo Tuesday. “What we try to do is reduce our portfolio sensitivity to rising rates, so Treasuries in our portfolio only serve liquidity reserve purposes.”
Treasuries fell for a sixth day Monday, the longest losing streak since June 2013, as futures prices indicated a 68 percent chance of a December liftoff. Those odds were at 35 percent on Oct. 27, the day before the Fed said in a statement that policy makers would reassess the benchmark rate at their “next meeting.” Since then a chorus of Fed officials have reinforced that view, and a report last week showed U.S. employers added the most jobs this year in October.
The U.S. 10-year note yield dropped three basis points, or 0.03 percentage point, to 2.32 percent as of 11:08 a.m. London time, according to Bloomberg Bond Trader data. It was as high as 2.37 percent on Monday, a level unseen since July 21. The 2 percent security maturing in August 2025 rose 1/4, or $2.50 per $1,000 face amount, to 97 1/4.
“Most market participants have already discounted the very high probability of a rate hike in December,” driving up yields, said Hajime Nagata, a debt money manager in Tokyo at Diam Co., which oversees about $140 billion. “The market has shifted from when is the first rate hike to when is the second rate hike, when is the third.”
Boston Fed President Eric Rosengren is the latest policy maker to flag the December meeting as an option for raising rates from near zero, in a speech in Portsmouth, Rhode Island, on Monday. Fed Chair Janet Yellen said Nov. 4 it was a “live possibility.” She speaks again this week, along with New York Fed President William C. Dudley, Chicago Fed President Charles Evans and Richmond Fed President Jeffrey Lacker.
“We expect the curve to flatten with short yields rising, but long rates are not likely to go up very significantly from here,” Loomis’s Eagan said of Treasuries. “It would be hard to see long U.S. rates moving too high up in the context of a low-yield world.”
The gap between two- and 30-year U.S. yields has narrowed to 223 basis points from a high this year of 257 basis points in July. It dipped to a two-month low of 210 basis points on Friday.
Ten-year Treasury note yields at 2.33 percent compare with German bunds at 0.63 percent and Japanese government bonds at 0.315 percent.
The Loomis Sayles Bond Fund has struggled this year, posting a 4.7 percent loss and underperforming 97 percent of its peers. Over a five-year span, it has outperformed 92 percent of rivals.
While Eagan is staying away from Treasuries, he sees value in high-yield U.S. corporate debt, particularly in the beaten-down energy sector, even though he said defaults will increase.
“This is actually where there’s good value if you understand the research component,” he said. “It’s a lot of yield pickup relative to Treasuries. It looks very attractive.”