U.S. Yield at 16-Year High Versus Germany Is Too Wide for Grossby and
Five-year yield difference widens to 1.81 percentage points
Spread isn't reason enough to buy Treasuries, Daiwa SB says
The extra yield five-year Treasuries offer over their German counterparts climbed to the highest in 16 years. Bill Gross said the move has been excessive.
The spread widened to 1.81 percentage points on Wednesday, the most since July 1999, and more than five times the average for the past decade. The shift highlights the divergence in monetary policies as Federal Reserve officials debate whether to raise interest rates in December, while European policy makers contemplate adding stimulus. European Central Bank President Mario Draghi addressed the European Parliament in Brussels Thursday, while Fed Chair Janet Yellen is scheduled to speak in Washington.
The premium is “too wide,” Gross, who previously managed the Pimco Total Return Fund and now runs the Janus Global Unconstrained Bond Fund, commented in a Twitter post on Nov. 10.
The benchmark U.S. 10-year note yield fell two basis points, or 0.02 percentage point, to 2.32 percent as of 6:43 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 rose 5/32, or $1.56 per $1,000 face amount, to 99 13/32.Treasury markets were shut Wednesday for Veterans Day.
Five-year notes yielded 1.71 percent in the U.S. and minus 0.08 percent in Germany.
“While we favor Treasury-bund spread widener trades as we see policy divergence to continue, the yield gap has reached levels which we think present a profit-taking opportunity,” said Felix Herrmann, a bond analyst at DZ Bank AG in Frankfurt. “The belly of the curve or the five-year area would be the part we would go for. We would be a buyer of Treasuries against German bonds on a tactical basis.”
Investors have been adding to bets for the Fed to raise U.S. rates after a government report last week showed employers added the most jobs this year in October.
The probability the central bank will increase its benchmark by its December meeting has risen to 66 percent, more than doubling since early October, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.
ECB officials will reexamine their monetary stimulus program in December and they’ve discussed cutting the central bank’s deposit rate to boost inflation, Draghi said last month.
Investors betting on the spread may get further guidance from Thursday’s speeches. Yellen is scheduled to make welcoming remarks at a conference on monetary policy in Washington, where St. Louis Fed President James Bullard and Richmond Fed President Jeffery Lacker are also due to speak. Draghi said Thursday that economic risks to the euro region were “clearly visible.”
The U.S. plans to sell $16 billion of 30-year debt Thursday. The securities yielded 3.11 percent in pre-auction trading, compared with 2.914 percent at a previous sale of 30-year bonds on Oct. 8. The Treasury auctioned $24 billion of 10-year notes Tuesday and $24 billion of three-year debt a day earlier.
The widening U.S. premium over Germany isn’t reason enough to buy Treasuries, said Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, which oversees $47.2 billion.
“This is a very rare case,” he said. “There’s a very high probability of completely opposite policy changes this December. I have never experienced this.”
Daiwa SB reduced its bearish position in Treasuries after last week’s jobs report because yields have risen enough to reflect expectations for the Fed to act, Katayama said. The company is bullish on European bonds and plans to add to the position, he said.