U.S. Yields Rise to Highest Versus Stock Dividends in Six Months

Treasury yields climbed to the highest compared with U.S. stock dividends in six months as Mohamed El-Erian said employment gains are bolstering expectations for the Federal Reserve to raise interest rates.

U.S. 10-year notes yielded 2.41 percent at the end of last week, or 40 basis points more than the Standard & Poor’s 500 Index dividend, the biggest premium since Nov. 24. Treasuries trading volumes are picking up as yields increase.

Sovereign bonds slumped after a government employment report last week beat economists’ estimates and boosted speculation the Fed will increase borrowing costs in 2015, said El-Erian, who is the chief economic adviser at Allianz SE and a Bloomberg View columnist.

“We are bouncing back and the Fed is likely to hike this year,” he said June 5 in an interview with Bloomberg. “It was a clear message: higher yields.”

Economic growth that’s strong enough to spur the central bank to raise interest rates is a mixed message for stocks, according to El-Erian. Shares have benefited from investors who are seeking higher returns than they can get from government bonds.

“The equity market is torn,” he said. “People realize that central banks have been the market’s best friend and they would like the Fed to remain ultra-loose. At the same time, they look and say, ‘You know what, we like the fact that fundamentals are getting better.’”

Treasury benchmark 10-year notes yield fell two basis points, or 0.02 percentage point, to 2.39 percent as of 10:42 a.m. in London, according to Bloomberg Bond Trader data, after climbing 29 basis points last week. The 2.125 percent note due May 2025 rose 7/32, or $2.19 per $1,000-face amount, to 97 23/32.

Quarterly Loss

U.S. government securities have fallen 2.3 percent this quarter, reflecting price changes and interest payments, according to data compiled by Bloomberg. The S&P 500 has returned 1.6 percent after accounting for reinvested dividends, the data show.

Equities should be able to absorb the impact of higher interest rates, provided bond yields rise more gradually and companies improve profits, according to Goldman Sachs analysts including Peter Oppenheimer. Yields should rise after they fell to levels well below those justified by fundamentals, they wrote.

“Slower and more gradual increases in yields over time are likely to coincide with further progress in the broad stock indices as better earnings emerge and dividends grow,” the strategists wrote in a note dated June 5.

Payrolls Acceleration

Payrolls climbed in May by the most in five months and worker pay accelerated, according to Labor Department data released June 5.

After last week’s selloff in Treasuries, Barclays strategists recommended long positions in 10-year notes, as they look more attractive on a risk-reward basis yielding 2.40 percent, London-based fixed-income analyst Cagdas Aksu wrote in a note June 8. Further selloffs will be limited due to the levels yields have reached, he said.

The amount of Treasuries traded through ICAP Plc, an inter-dealer broker of U.S. government debt, has picked up during the bond selloff. Volume averaged $390.7 billion a day from April 30 through June 5, according to ICAP. The figure compares with $326.9 billion for the first four months of the year.

Ten-year Treasuries will end the year at 2.45 percent as the economy improves, based on Bloomberg surveys of banks and securities companies. The S&P 500 will advance almost 7 percent, based on the surveys.

“This economy is strengthening,” said El-Erian, who also previously worked at Pacific Investment Management Co.

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