Treasuries a Buy on Real Yields at Two-Year High, Haverford Says

After avoiding Treasuries for the past three years, Haverford Trust Co. says the 10-year notes are a buy as real yields have increased to the most in more than two years.

“Inflation expectations are down and yields are up,” said John Donaldson, director of fixed income at the Radnor, Pennsylvania-based company in a telephone interview yesterday, who helps to manage $1.25 billion and started purchasing Treasuries about 11 days ago. “That changes the equation a little bit.”

The real yield, the difference in 10-year note yields and the annual inflation rate of the consumer price index, widened to 1.19 percentage points yesterday, the most since March 2011, exceeding the 1.13 percentage-point average of the past decade. The CPI rose 1.4 percent in May, down from a 2013 high of 2 percent in February.

The nominal yield on the 10-year note climbed 40 basis points last week, the most since the start of the Iraq war in 2003 as investors fled the debt after the Federal Reserve said it may reduce bond purchases. Yields climbed to 2.66 percent yesterday, the highest level since August 2011.

Fed Chairman Ben S. Bernanke told reporters in Washington on June 19 that policy makers are prepared to begin phasing out bond buying later this year and halt purchases around mid-2014 as long as the economy meets the central bank’s forecasts.

Yield ’Overshoot’

“For the first time in a good while, several factors line up favorably,” Donaldson said. “The increase in real yields, budget improvements, higher yields and also the relative value of other sectors.”

Donaldson said he expects yields will be higher by year-end, and may reach 2.75 percent even as he predicted they will move back a bit lower in the short term.

“This is an overshoot,” he said. “The market habitually gets ahead of the Fed. This much pop in that time period feels very oversold.”

The U.S. will sell $99 billion in notes this week. It is “highly probable” that the company will buy in the secondary markets this week, Donaldson said, adding that the company may not buy at the auctions.

Before it's here, it's on the Bloomberg Terminal.