Mirae Shows No Fear of Fed Rate Increase as It Adds Treasuries

  • Company plans to buy when 10-year yield increases to 2.30%
  • U.S. yields will decline by year-end, Bloomberg survey shows

Mirae Asset Global Investments is buying Treasuries in a bet prices already reflect expectations for the Federal Reserve to raise interest rates.

Two-year yields approached 1 percent last week, reaching the highest level since May 2010. The Labor Department reported a November jobs gain that was bigger than economists predicted, underscoring expectations among traders that the U.S. economy is growing enough for the Fed to act at its meeting on Dec. 15-16. Treasury prices fell on Monday.

“The first hike will not be a disaster,” said Will Tseng, one of the bond investors for $73 billion under management at the company, who is based in Taipei. “Treasuries will perform well. Inflation expectations are growing but continue below 2 percent,” the central bank target, he said.

Two-year yields climbed two basis points Monday to 0.96 percent as of 6:47 a.m. in London, according to Bloomberg Bond Trader data. Benchmark 10-year yields advanced by the same amount to 2.29 percent.

Mirae bought last week when the 10-year yield rose to 2.3 percent and plans to add more if it reaches that level this week, Tseng said.

Two-year yields will decline to 0.89 percent and 10-year yields will drop to 2.24 percent by year-end, based on a Bloomberg survey of economists with the most recent forecasts given the heaviest weighting.

Fed Action

There’s a 78 percent probability the Fed will increase its benchmark by its December 15-16 meeting, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed as high as 1.67 percentage points last week, the most since August.

Fed officials are working to prepare investors for the policy shift, Tseng said. In testimony before Congress’s Joint Economic Committee on Dec. 3, Chair Janet Yellen signaled the conditions necessary for an interest-rate increase have been met and she hopes to tighten monetary policy slowly after liftoff.

“Fed policy is clearer than at any time,” Tseng said.

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