Treasury Yield Rises to Nine-Year High Versus Sovereign Peers

  • Premium on U.S. long-term debt climbs to 1.4 percentage points
  • U.S. seen raising rates in 2016 while other economies stagnate

Treasuries pay the most compared with other government bonds in almost a decade -- and the danger to debt holders is that U.S. yields keep rising.

America’s sovereign securities due in 10 years or longer yielded 1.4 percentage points more than their counterparts around the world Tuesday, based on Bank of America Merrill Lynch indexes. The premium is the widest since July 2006.

The difference highlights investor expectations for quickening growth and rising interest rates in the U.S., while other economies stagnate or slow. The probability the Federal Reserve will follow its rate increase this month with another next year is about 94 percent, futures contracts indicate.

“We could get some more widening of the yield spread,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The Fed could move once a quarter. But the market will continue to price maybe only one to two hikes at a time, because you have to price some probability as well that something bad happens and the Fed has to stop - or is even forced to reverse course.”

Treasury prices rose Wednesday, trimming some of a selloff from Tuesday. The benchmark U.S. 10-year note yield dropped one basis point, or 0.01 percentage point, to 2.30 percent as of 7 a.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent security due in November 2025 rose 3/32, or 94 cents per $1,000 face amount, to 99 19/32. Yields jumped seven basis points Tuesday.

Ten-year Treasury yields may rise to around 2.50 percent in three months and 2.75 percent in six to 12 months, Danske’s von Mehren said.

Bond Returns

Treasuries have returned 0.7 percent in 2015, down from 6.2 percent last year, based on Bloomberg World Bond Indexes.

The U.S. economy will grow 2.5 percent in 2016, versus 1.1 percent in Japan and 1.7 percent in the euro area, based on Bloomberg surveys. The pace of expansion in China’s economy, the largest after the U.S., will be 6.5 percent, the slowest since 1990.

“The U.S. is increasing its policy rate and that will continue,” said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance, which has $54 billion in assets. “The U.S. economy is good compared to other countries.” Suzuki said he prefers to hold his money in cash.

Before it's here, it's on the Bloomberg Terminal.