Stripping Treasuries Climbs to 17-Year High to Feed Duration Fix

Inside the Unprecedented World of Negative Yields
  • Corner of market swells to $223 billion, most since 1998
  • Insurance companies, pensions covet bonds for higher yields

Wall Street’s answer to a growing pool of negative-yielding bonds worldwide: stripping U.S. Treasuries.

The outstanding amount of Treasury notes and bonds split into principal- and interest-only securities jumped to $223.1 billion in June, the highest level in more than 17 years, according to Treasury Department data released Thursday. While principal-only securities outperform unstripped debt as yields decline, they’re among the most vulnerable to rising inflation and interest rates, neither of which have materialized amid slow global growth.

Long-term investors like pension funds and insurance companies are running out of investment options as nearly $10 trillion of government debt worldwide yields less than zero. That phenomenon boosted demand for stripping the longest-dated U.S. securities in a push for higher yields. Wall Street firms split bonds into their face amount and individual coupon payments.

Long-dated principal strips have returned 29.3 percent in 2016, compared with 6.5 percent for the U.S. Treasury market broadly, according to Bank of America Corp. index data. They also beat 30-year Treasury bonds, which have earned 21.2 percent.

The $7.4 billion, or 3.4 percent, increase in outstanding strips last month was the biggest since February 2013, Treasury data show. Most of the stripping activity focused on Treasuries maturing in 2045 and 2046, according to an analysis from Jefferies LLC.

Strips is short for separate trading of registered interest and principal securities. The yield on 30-year Treasuries has plunged this year by 88 basis points, or 0.88 percentage point, to 2.13 percent.

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