BlackRock Cuts Treasuries Exposure on Hedging Cost as Bonds Fall

BlackRock's Rieder on Corporate Bonds, Treasuries
  • Foreign buying will slow down from some investors, Rieder says
  • Benchmark yields climb as factory shipments, new orders rise

BlackRock Inc. is reducing its exposure to long-dated U.S. Treasuries as increased hedging costs from Japan to Europe make the debt less alluring to some foreign investors.

Yields on benchmark U.S. 10-year notes are negative for Japanese buyers and about zero for euro-based investors who pay to eliminate currency fluctuations from their returns, even after yields climbed Monday as regional data showed increases in factory shipments and new orders. That’s caused life insurers and other long-term asset managers to turn to corporate securities or mortgage-backed obligations to lock in higher interest rates.

“We’ve reduced some of our exposure to 10-year Treasuries, to the back end of the yield curve,” because of costs to hedge currency risk, said Rick Rieder, chief investment officer for global fixed income at BlackRock, in an interview on Bloomberg Television. “It’s a big deal that it’s become expensive to hedge. The buying will continue, but not nearly at the pace it has.”

For more on hedging costs for foreign investors, click here.

Treasuries have surged this year as the Federal Reserve held off on raising interest rates following its December liftoff. Subdued global growth has pushed investors worldwide to seek positive yields in the U.S. with $9 trillion of sovereign debt yielding less than zero. The demand for dollars and dollar-denominated assets has pushed up the cost to get into and out of the greenback at the same exchange rate.

The Treasury 10-year note yield increased four basis points, or 0.04 percentage point, to 1.56 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 99 15/32. The yield dropped to a record 1.318 percent last month.

The 30-year Treasury bond yield rose five basis points to 2.28 percent. 

A regional manufacturing index from the New York Fed showed that shipments and new orders increased in August, even as a broader gauge showed contraction. Strategists from Barclays Plc to BNP Paribas SA cited those elements as positives for manufacturing in the northeast U.S.

With government debt yields within 25 basis points of record lows, investors are willing to accept as little as 216 basis points of extra yield to buy company debt instead of Treasuries, the smallest spread in more than a year, based on a Bank of America Corp. index of investment-grade and high-yield securities.

Rieder said the trend toward lower corporate spreads could persist for “another year or two” because investors are seeking additional yield and default rates will remain subdued. He joins Mark Kiesel, chief investment officer for global credit at Pacific Investment Management Co., in seeing better value in the corporate-bond market.

U.S. government debt has returned 5.4 percent in 2016, according to the Bloomberg U.S. Treasury Bond Index, through Aug. 12. A similar gauge of investment-grade corporate debt earned 9.2 percent.

Bond investors will get a glimpse into the minds of Fed policy makers this week, when the central bank releases the Federal Open Market Committee’s July minutes on Wednesday. The implied probability of a hike this year is about 47 percent, up from 42 percent at the end of last week, according to futures data compiled by Bloomberg. The chance of a boost next month is just 18 percent.

Investors should watch “how mixed is the discussion on that Fed board, as opposed to just a couple thinking we could raise rates this year,” Rieder said. “I think they’re going to try to go in December.”

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