Treasury Yield Premium Over G-7 Peers Widens to Most Since 2007

  • Fed set to issue minutes of October meeting Wednesday
  • Bigger spread makes Treasuries cheap: Nikko Asset's Bridges

The extra yield Treasury two-year notes offer over their Group-of-Seven peers widened to the most since 2007 as the Federal Reserve considers raising interest rates as soon as next month.

The spread reached about 77 basis points before the Fed’s release on Wednesday of minutes from its Oct. 27-28 meeting. Policy makers said after that session that they’ll consider raising the overnight target rate at their Dec. 15-16 gathering. By contrast, the European Central Bank is considering adding monetary stimulus.

“The Fed is talking about ‘We’re going to raise rates’ and the ECB is talking about easing,” said Roger Bridges, chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management Australia, which oversees $16.4 billion. “That’s really saying that the U.S. is cheap.”

The U.S. two-year yield rose two basis points, or 0.02 percentage point, to 0.88 percent as of 9:08 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 0.75 percent security maturing in October 2017 fell 1/32, or 31 cents per $1,000 face amount, to 99 3/4.

The note’s yield reached a five-year high of 0.95 percent on Nov. 6, when a report showing a surge in U.S. job growth bolstered expectations that the Fed will lift rates in December. The yield level compares with minus 0.03 percent on similar-maturity Japanese government debt, and minus 0.38 percent in Germany.

The benchmark U.S. 10-year note yielded 2.29 percent, after touching a three-month high last week.

Divergence Dilemma

Richmond Fed President Jeffrey Lacker, speaking on CNBC on Wednesday, said the case for the Fed to raise interest rates is strong. The comments set the stage for Wednesday’s release of the Fed’s October minutes.

"We’re trying to see whether the underlying tones were quite as strong as some of the FOMC members have been and the statement," said Gennadiy Goldberg, U.S. interest-rates strategist in New York at TD Securities, one of the 22 primary dealers that trade with the Fed.

Underscoring the divergence between the Fed and other developed-market central banks, ECB President MarioDraghi said Nov. 12 that risks to the euro-zone economy are “clearly visible” and reiterated that policy makers next month will take another look at the stimulus they’re providing.

Japanese Stimulus

The Bank of Japan, whose policy meeting ends Thursday, is expanding its monetary base at an annual pace of 80 trillion yen ($649 billion).

Meanwhile, the probability the Fed will increase its benchmark by its December meeting has risen to 66 percent, almost 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.

“The focus of global bond markets remains on potential spread-widening” between the U.S. and European bonds, UniCredit SpA strategists including Michael Rottmann, Munich-based head of fixed-income research, wrote in an e-mailed note. “Risk is skewed towards higher yields across the U.S. Treasuries curve.”

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