Treasuries Trail Stocks by Most Since January on Fed Outlook

Treasuries lagged behind stocks this month by the most since January on speculation the Federal Reserve will curtail its bond purchases if policy makers are confident that improvements in economic growth are sustainable.

U.S. government securities fell 1.8 percent in May as of yesterday, headed for the steepest monthly loss in three years, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of stocks returned 1.1 percent including reinvested dividends, data compiled by Bloomberg show. A $29 billion seven-year sale yesterday drew the highest yield in more than a year.

“We have been short Treasuries,” said Park Sungjin, head of asset management in Seoul at Meritz Securities Co., which oversees $7 billion. “I should have been much more aggressive. The economy has been good, and that supports the stock market.” A short position benefits when an asset falls.

Benchmark 10-year yields were little changed today at 2.11 percent as of 6:55 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 was 96 26/32. The yield climbed to 2.23 percent May 29, which was the highest level in a year. It is still less than the average of 3.58 percent for the past decade.

Japan’s 10-year rate slid 2 1/2 basis points to 0.865 percent today. A basis point is 0.01 percentage point. The nation’s government bonds have fallen 1.5 percent this month, the biggest decline in five years, according to the Bank of America indexes.

Securities in the Bank of America Merrill Lynch Global Broad Market Index have fallen 1.4 percent in May, poised for the steepest loss since April 2004.

Bernanke Testimony

The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on interest rates. Fed Chairman Ben S. Bernanke said last week the Fed could “take a step down in our pace of purchases” in the “next few meetings,” in testimony to lawmakers.

Treasury volatility as measured by the Bank of America Merrill Lynch MOVE index climbed to 81.22 on May 29 as yields surged, marking the highest level in almost a year. It was at 77.41 yesterday.

Trading volume dropped to $398 billion yesterday, after rising to $631 billion the day before, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It reached $662 billion on May 22, the highest level in data going back to 2004. The average daily volume for this year has been almost $300 billion.

Inflation Expectations

The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, probably rose 0.8 percent in April from 12 months earlier, based on a Bloomberg News survey of economists before the Commerce Department reports the figure at 8:30 today in Washington. It would be the smallest increase since October 2009.

Personal income rose 0.1 percent in April from March and spending was unchanged, the report may show, according to the survey.

The difference between rates on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 2.15 percentage points yesterday, the smallest spread since July.

The U.S. 10-year yield adjusted for consumer prices, that are running at an annual rate of 1.1 percent, was as high as 1.13 percent this week. The figure was negative as recently as March.

The seven-year sale yesterday drew the most interest from non-primary dealer investors since December. Primary dealers are the 21 companies that underwrite the U.S. debt.

Note Auction

Indirect and direct bidders combined to win about 61 percent of yesterday’s offering, compared with an average of about 56 percent at the previous 10 auctions. The notes sold at what is known as a high yield of 1.496 percent, the most for a seven-year security at an auction since March 2012.

The Treasury’s sale of $35 billion of five-year notes on May 29 attracted the most interest from non-primary dealer investors since at least 2003.

Equities weren’t always beating bonds throughout May. The opposite happened yesterday, when Japan’s Nikkei 225 Stock Average tumbled 5.2 percent, spurring demand for the relative safety of Treasuries during Asia trading hours.

It may be a sign of things to come in the weeks ahead, said Will Tseng, a bond trader in Taipei at Mirae Asset Global Investments, which oversees $50 billion.

“When equity investors begin to take profits, it will cause cash to go into the bond market,” he said. Ten-year yields will probably stay under 2.4 percent in June, he said.

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