Treasuries Lose Out to Negative-Yield Debt in Germany and Japan

  • `I sold a small amount of Treasuries,' Daiwa's Katayama says
  • U.S. debt will remain underpinned by flight to safety: Mizuho

For all the talk that America’s bonds will attract investors as yields drop below zero in Germany and Japan, Treasuries are lagging behind and the underperformance is even worse after accounting for a weakening dollar.

German government securities have returned 3.9 percent in the month ended Wednesday based on changes in both the debt and the currency, according to Bloomberg World Bond Indexes. Japan’s gained 3.7 percent, while Treasuries rose 1.2 percent.

European and Japanese bonds are being supported by speculation central banks in those regions will increase their record debt purchases as they battle to stave off deflation. The result is that Treasuries are trailing their peers even though U.S. five-year notes yield 1.27 percent, versus minus 0.30 percent in Germany and minus 0.13 percent in Japan.

“I sold a small amount of Treasuries today,” said Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, which has $50.9 billion in assets. He described Thursday’s sale as a temporary move reflecting his view that a flight to quality in the financial markets may be easing.

Treasuries halted a three-day decline on Thursday with the 10-year note yield little changed at 1.82 percent as of 6:34 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in February 2026 was at 98 1/4.

Japan sold five-year bonds at minus 0.138 percent Thursday, the first time the securities drew a negative yield in data starting in 2000. Investors bid for 3.57 times the amount available, down from 4.1 times at the previous sale in January.

The dollar has weakened 2.9 percent against the yen and 2 percent versus the euro in the past month as investors scaled back expectations for the Fed to boost interest rates. The central bank raised its benchmark from close to zero in December and indicated at the time it would make four more increases in 2016.

Recent market turmoil that has helped push down inflation expectations has given policy makers more scope to wait, according to Fed Bank of St. Louis President James Bullard.

“I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,” Bullard, who votes on the policy-setting Federal Open Market Committee this year, said in a speech Wednesday in St. Louis.

Inflation Outlook

The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, dropped to 1.12 percentage points on Feb. 11, the lowest in almost seven years. The U.S. is scheduled to sell $7 billion of 30-year TIPS Thursday.

Despite the underperformance relative to their peers, Treasury yields are likely to fall further as demand for haven assets continues, according to Mizuho International Plc.

“We have absolutely no fundamental change so far this year in the factors that drove the selloff in banks and the Fed will take a number of months to actually step in and turn their policy mistake around,” said Peter Chatwell, head of rates strategy at Mizuho in London. “We are still likely to see flight to quality and curve flattening trades in Treasuries. Rates and government bonds globally still have a very supportive environment.”

Futures traders see a 41 percent chance the Fed will boost its target in 2016, down from a 93 percent probability assigned at the end of last year. The calculation is based on the assumption the rate will be at the middle of the new target range after the next increase.

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