Coutts Challenges Bond Bears as Hedge Funds Bet on 10-Year Notes

  • Fed scheduled to issue minutes of December meeting Wednesday
  • Treasuries rise on North Korea bomb test, weaker Chinese yuan

Coutts & Co., the 300-year-old bank for the wealthy, is challenging the consensus by saying now is not the time to be bearish on Treasuries.

“We wouldn’t look for very much in the way of rate hikes” from the Federal Reserve, Alan Higgins, chief investment officer at the London-based bank, said in an interview Tuesday. “Bond yields will remain low and give you very low returns. But we’d go against the consensus bond-bear-market trend.”

Coutts’s view underscores investor concern the U.S. economy isn’t strong enough to justify higher interest rates. Hedge funds and other institutions speculating in the futures market are joining the bullish ranks by buying 10-year Treasury note contracts. The Fed is scheduled to release the minutes of its December meeting Wednesday, after raising rates at the session for the first time in almost a decade. Policy makers have indicated they will make four more increases this year.

U.S. government securities rose for a fifth day Wednesday, the longest winning streak since July, as North Korea conducted a hydrogen bomb test and China took steps to weaken its currency, spurring demand for safer assets.

“That led to some buying in Treasuries,” said Ali Jalai, a bond trader at Bank of Nova Scotia in Singapore. “Volume is just a bit more than normal.”

The 10-year note yield declined two basis points to 2.22 percent as of 6:48 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 advanced 5/32, or $1.56 per $1,000 face amount, to 100 1/4.

Against Consensus

Treasuries are starting 2016 by going against the consensus. Benchmark 10-year yields will rise to 2.80 percent by Dec. 31, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weighting. Investors buying Wednesday would lose about 2 percent if the prediction proves accurate, based on Bloomberg data.

Hedge funds and other speculators had a net position in 10-year notes of 42,981 contracts at the end of December, the highest level since August, based on the latest data from the U.S. Commodity Futures Trading Commission. For five-year notes, traders were still short -- betting prices will fall -- though they are trimming the position.

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