Sovereign Bonds Beating Stocks in October by Most in Two Years

For all the gyrations in bonds over the past week, government securities are beating stocks in October by the most in two years. Treasuries rallied today.

The Bloomberg Global Developed Sovereign Bond Index has returned 1.8 percent this month, versus a 4 percent decline for the MSCI All-Country World Index of shares including reinvested dividends. It’s the biggest outperformance since May 2012, driven by signs global economic growth is slowing. Volatility in Treasuries surged last week to the highest in more than a year.

“Yields could go down again,” said Yusuke Ito, a senior fund manager in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $37.4 billion. “There’s a growing recognition that the potential growth of the United States, and the entire world, is not so strong.”

Benchmark U.S. 10-year yields declined five basis points to 2.14 percent at 6:27 a.m. London time, Bloomberg Bond Trader data show. The price of the 2.375 percent note due in August 2024 rose 13/32, or $4.06 per $1,000 face amount, to 102 1/32.

Ito said Mizuho favors 30-year Treasuries, those that will rise most if yields fall. He dropped his forecast that 10-year yields would be at 2.25 percent in 12 months and now predicts a 2 percent level.

Australia’s 10-year yield slid 11 basis points to 3.19 percent, while Japan’s was little changed at 0.48 percent.

Bank of America Merrill Lynch’s MOVE index, a gauge of price swings in Treasuries, rose on Oct. 15 to the highest level since September 2013.

Decline Reversed

That came as 10-year yields tumbled by the most in 5 1/2 years on concern the global recovery will stumble on stagnation in Europe, the spread of Ebola and conflicts in the Middle East and Ukraine. Yields have since reversed most of the decline.

Forecasts for the Federal Reserve to keep its benchmark interest rate at a record low close to zero are supporting U.S. government bonds, said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo.

Almost six years after the Fed started buying bonds and holding its benchmark interest rate at about zero, investors are preparing for policy makers to withdraw the policies.

U.S. central bankers have been planning to end their debt purchases this month and have discussed raising their benchmark next year. The Fed has kept its target for the main rate, which banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008.

Futures contracts suggest traders are postponing bets on when the central bank will act.

January 2016

The implied yield on 30-day federal fund futures contracts expiring in January 2016 was 0.51 percent, the first month to price in a quarter-percentage-point increase in the Fed’s target. Three weeks ago, traders expected policy makers to move in September 2015, the contracts show.

“They’re going to keep waiting until they see real health on an extended basis, and then they’ll start talking seriously about when they’re going to hike interest rates,” said Ethan Harris, the co-head of global economics research at Bank of America Corp. in New York. “They’re certainly in no rush right now,” Harris said yesterday on Bloomberg Television’s “Street Smart” with Trish Regan and Mia Saini. Bank of America’s Merrill Lynch unit is one of the 22 primary dealers that trade directly with the Fed.

The International Monetary Fund this month cut its forecast for global growth in 2015 to 3.8 percent from a July prediction for 4 percent. It reduced the projection for Europe to 1.3 percent from 1.5 percent.

The Washington-based fund raised its outlook for the U.S. to 3.1 percent from 3 percent.

(An earlier version of this story corrected a reference to percentage point from basis point.)

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