Treasury Investors Predict April Loss After Four Gains

Treasuries have risen in April during each of the past four years. This time, investors are betting on a loss.

U.S. government securities fell today as data showed an expansion in Chinese manufacturing beat economist forecasts, damping demand for the safest assets. Analysts project U.S. data will show manufacturing improved in March, while figures later this week will indicate hiring picked up, based on a Bloomberg News survey. Fukoku Mutual Life Insurance Co. and Daiwa SB Investments Ltd. said Treasuries will fall in coming weeks.

“Yields will go up,” said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $59 billion in assets. “We will see better numbers” on the economy, he said.

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 2.75 percent at 7:13 a.m. in New York, according to Bloomberg Bond Trader data. The 2.75 percent note maturing in February 2024 fell 7/32, or $2.19 per $1,000 face amount, to 100 1/32. The yield has averaged 3.45 percent during the past decade.

Ten-year borrowing costs will approach 3 percent by the end of the month, Suzuki said. An increase to 2.90 percent on April 30 would result in a loss of 1.1 percent for an investor who buys today, data compiled by Bloomberg show.

The yield will increase to 3.05 percent by June 30, based on a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.

Policy Normalization

“We still expect to see the data come through and the Fed policy normalization path to come through,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Plc in London. “From many different perspectives, it points to a 10-year yield that should be 3 percent or above.”

Standard Chartered predicts the benchmark yield will rise to 3.5 percent by year-end, Davies said.

Treasuries have gained 1.25 percent in the month of April on average since 2010, based on the Bloomberg U.S. Treasury Bond Index. It’s the only month with such a long record of gains. Reasons ranged from slowing economic growth to the European debt crisis to Fed purchases of U.S. government debt.

Investors pulled $10.3 billion out of exchange-traded funds that buy U.S. government debt in March, the biggest exodus since December 2010, data compiled by Bloomberg show.

“The Treasury market is in trouble,” Matthew Hornbach, the global head of interest rate strategy at Morgan Stanley, told clients in a report March 7. The New York-based company is one of the 22 primary dealers that underwrite the U.S. debt.

Manufacturing Growth

The Institute for Supply Management’s U.S. manufacturing index rose to 54 in March from 53.2 in February, according to the Bloomberg surveys. The U.S. economy added 200,000 jobs last month, versus 175,000 in February, based on a separate survey before the Labor Department report on April 4.

The Chinese Purchasing Managers’ Index was at 50.3 in March, an official report showed today, versus 50.2 in February and the 50.1 median estimate in a Bloomberg survey. In a separate release, Markit Economics said its index of euro-area manufacturing fell to 53 from 53.2. The average for the currency bloc for the first quarter was 53.4, the highest since the second quarter of 2011, it said.

“The official Chinese PMI didn’t surprise to the downside and that’s helped put yields a little higher,” Standard Chartered’s Davies said. “There’s also some relief that euro-area PMIs have come through as they have. We’ve made it through the euro-area data today with good news, by and large.”

Underpin Demand

Low inflation and demand for safety after Russia’s annexation of Crimea will keep 10-year yields in a range of 2.60 percent to 2.90 percent this month, said Hideaki Kuriki, a bond trader in Tokyo at Sumitomo Mitsui Trust Asset Management Co., which has the equivalent of $41 billion in assets.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.14 percentage points. The average over the past decade is 2.21 percentage points.

Two-year notes rose yesterday after Federal Reserve Chair Janet Yellen said “considerable slack” in labor markets showed that the central bank’s accommodative policies will be needed for “some time.”

The comments damped speculation the Fed is preparing to raise interest rates next year, after Yellen said in March the central bank might start increasing the benchmark rate about six months after ending its bond purchase program. She didn’t mention a timetable yesterday.

Kei Katayama, a bond investor in Tokyo at Daiwa SB Investments said benchmark yields will climb toward 3 percent this month. “The economy is doing fine” he said. “Yields will go up.”

(Corrects 11th paragraph of article published April 1 to show Morgan Stanley report was issued March 7. Adds that the quoted material was written by Matthew Hornbach.)
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