Treasuries' Bull Case Boosted by Yield Collapse of Rivals, Haven

  • Japanese bought $17.5 billion of overseas bonds in latest week
  • Treasury-German bond yield spread drops from 3-week high

U.S. Treasuries are enticing investors with their relative safety and higher yields, as oil prices declined and China’s stocks slumped.

The yield spread between U.S. Treasuries and German bonds narrowed from a three-week high of 160 basis points on Thursday. The search for higher yields among the safest assets has intensified after a global stocks rout and concern over China’s economic outlook pushed bond yields from Japan and the euro-region deeper below zero. Crude has slumped about 13 percent in New York trading this year on speculation a glut will persist with an outlook for increased shipments from Iran and brimming U.S. supplies.

“With inflation still low on the back of oil staying so weak, the market just keeps buying into the safety and liquidity of U.S. Treasuries,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “While these yield levels are a bit stretched, some people are just not buying negative-yield assets. So, the simple fact of offering positive yields is a strong supportive factor for Treasuries.”

Benchmark Treasury 10-year note yields fell one basis point to 1.74 percent as of 7:10 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 rose 1/8, or $1.25 per $1,000 face amount, to 99.

Investors in Japan purchased a net 1.97 trillion yen ($17.5 billion) of overseas debt in the week ended Feb. 19, following a week of net sales, the Ministry of Finance reported Thursday. The search for yields escalated after the Bank of Japan adopted a negative rate in January.

BOJ Governor Haruhiko Kuroda repeated Wednesday he won’t hesitate to adjust monetary policy again if needed. Japanese 10-year yields extended their record low to negative 0.065 percent. Forty-year yields fell below 1 percent for the first time.

“It’s really simple,” said Hiroki Shimazu, senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest lender. “There are very low Japanese government bond yields. It’s sometimes negative. It cannot pay their costs.” While the government doesn’t give the composition of the overseas purchases, Treasuries probably make up 60 percent to 70 percent of them, he said.

BlackRock Inc. said it has been fielding calls from clients seeking to safeguard returns in the new era of below-zero rates. Diam Co. said it has been conducting daily internal meetings since the BOJ made its announcement Jan. 29 to discuss ways to eke out returns. Japan Post Insurance Co., the nation’s largest insurer, said it may seek to replace low-yielding Japanese bonds with foreign holdings.

In Europe, the European Central Bank’s negative deposit rate and its bond-purchase program have combined to push yields of $2.2 trillion worth of European debt below zero.

“Why buy a German bund when you can pick up 150 basis points more in U.S. Treasuries?” said Richard Kelly, global head of strategy at Toronto Dominion Bank in London.

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