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Treasuries on Brink of History as Guggenheim Says Rally Not Over

  • U.S. government debt has returned 5.8 percent so far in 2016
  • Best start to year in two decades seen as just the beginning

The $13.4 trillion U.S. government bond market is on the brink of history.

Ten-year Treasury yields closed within 0.06 percentage point of their all-time low Monday. Even with bonds off to their best start to a year since 1995, two of the market’s most-experienced observers say the rally is only getting started.

Scott Minerd, chief investment officer for Guggenheim Partners, sees yields on the benchmark securities plunging to 1 percent by the end of the year, dragged down by record low borrowing costs around the world. And Gary Schilling, a 50-year veteran of the bond market, said the impact of Britain’s exit from the European Union on the global economy is a wildcard that will continue to push yields lower. 

"We don’t really know the depth of Brexit," said Schilling, president and founder of Springfield, New Jersey-based research firm A. Gary Shilling & Co. "As low as Treasury yields are, they’re still higher than most comparable developed countries."

The fallout from the U.K.’s decision to exit the European Union has boosted sovereign bonds from Germany to Japan, adding billions of dollars more in negative-yielding securities to the global debt market and fueling demand for comparatively higher-yielding Treasuries. While investors are set to pay the most ever for America’s debt, it also means lower borrowing costs for the government at weekly bill, note and bond auctions.

Forget Hikes

The bonds are off to the strongest start in 21 years, with Bank of America Corp.’s U.S. Treasury index returning 5.8 percent in 2016, propelled by the U.K. vote last week.

Even with U.S. 10-year yields close the record low 1.379 percent reached in July 2012, the securities still pay more than 17 of 25 developed nations tracked by Bloomberg. The world’s largest economy boasts growth exceeding that of Europe and Japan, adding to investor appetite.

Many of the same forces driving Treasury yields lower are also limiting the Federal Reserve’s capacity to raise interest rates. The market-implied probability of a rate boost by year-end was 8 percent Monday, futures data compiled by Bloomberg show. That’s down from a 50 percent chance assigned on Thursday before the U.K. vote.

"Forget any idea of any rate increase," Shilling said. "The odds of a rate decrease are increasingly likely. The next move by the Fed would be down, not up."

Shilling also expects 30-year Treasury yields to drop to a record low 2 percent by year-end, from 2.28 percent as of 7:34 a.m. New York time.

A downturn in inflation expectations also looks set to keep a lid on yields. A market measure of average inflation expectations over the next 10 years fell to 1.37 percent Monday, the lowest since February, as oil posted the biggest two-day loss in four months.

"You’ve seen global inflation expectation outlooks fall dramatically,” said Michael Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $325 billion. “Where that would signal the greatest ability for a major shift down in yield would be the 30-year part of the curve.”

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