- Two- and three-year U.S. debt ‘has no value’ after Brexit gain
- Treasuries snap two-day rally as bond market digests U.K. vote
BlackRock Inc.’s Rick Rieder has a message for investors betting on lower rates by snapping up shorter-dated Treasuries: Brexit alone won’t put a Federal Reserve interest-rate cut in play.
Treasuries halted a two-day rally ignited by last week’s U.K. vote to leave the European Union, which had sent two-year note yields to the lowest since October. Investors bought the securities as the market-implied probability of a rate increase by year-end dropped to about 11 percent, from 50 percent the day of the referendum, while the chances of a cut jumped to about 10 percent, futures data compiled by Bloomberg show.
The expectation that the Fed will lower rates is misguided, according to Rieder, the chief investment officer of global fixed income at BlackRock, the world’s largest money manager.
“The front end of the U.S. yield curve, i.e. two years, three years, has no value,” Rieder said in an interview on Bloomberg Television. “To some extent, the markets have priced in a high probability that the Fed is going to cut rates. I don’t think that’s even in consideration at any time in the near future unless there’s a real crisis that manifests itself.”
U.S. policy makers are trying to raise rates even as central banks abroad maintain or boost stimulus amid concern that global economic growth is slowing. After liftoff from near zero in December, Fed officials have twice cut projections for how quickly rates will rise. Fed Chair Janet Yellen said Brexit-related risk played into the central bank’s decision not to hike earlier this month.
Treasury two-year note yields rose two basis points, or 0.02 percentage point, to 0.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.625 percent security due June 2018 was 100.
U.S. 10-year note yields climbed three basis points to 1.47 percent, after falling by 31 basis points in the past two sessions. The record low is 1.379 percent, reached in 2012.
Reports released Tuesday showed signs the U.S. economy continues to strengthen. Consumer confidence rose in June to an eight-month high, according to the New York-based Conference Board. U.S. gross domestic product grew at an above-forecast 1.1 percent annualized rate in the first quarter as improved performance in trade and business investment more than made up for weaker consumer spending.
“There’s much to be optimistic about in the U.S. environment,” said Carl Tannenbaum, chief economist in Chicago at Northern Trust Corp., which oversees $900 billion. “As the Fed looks at conditions here, they don’t seem to suggest, at least for now, a need for easing.”
Yields climbed on German and U.K. government debt as traders favored riskier bonds and shares while they pondered what steps policy makers might take to limit the economic fallout from the British vote. Equity markets rose in the U.S. and Europe.
The world’s safest government bonds initially surged after Britons voted on June 23 to exit the largest trading bloc. That drove a rush for the relative safety of fixed-income securities and boosted the amount of global sovereign bonds with yields below zero to about $8.9 trillion.
“We’ve got an exceptionally strong initial reaction after the ‘Leave’ vote, and now the market is taking a wait-and-see stance for new guidance and impetus,” said Jussi Hiljanen, head of European macro and fixed-income research at SEB AB in Stockholm. “But in the grand scheme of things, political uncertainty will remain high in the second half of this year and that will limit risk appetite and is going to be good for bonds.”
For Rieder at BlackRock, longer-dated Treasuries offer the best value, and yields could rally by 15 to 20 basis points relative to shorter-term debt. The yield difference between two-year and 30-year Treasuries is already the smallest since 2008.
“I like long-end Treasuries here,” Rieder said. “U.S. interest rates, while organically not attractive at all, for the rest of the world, they are quite attractive.”
The post-Brexit rally in bonds pushed down the yield on Bank of America Corp.’s Global Broad Market Index of government and corporate debt to 1.12 percent as of Monday, the lowest in data going back to 1996.
Even amid the decline in yields, investors are wagering on an extended rally. Net long positions on U.S. Treasuries increased in the week ended Monday to the highest level since December 2010, according to an client survey from JPMorgan Chase.