Fidelity Calls U.S. Fairly Attractive as Yield Premium Climbs

  • Treasury yield climbs to highest in a decade versus peers
  • U.S. debt heads for biggest quarterly gain since 2012

Fidelity Capital Markets said the difference between yields on Treasuries and other bonds makes investing in the U.S. attractive, as America’s premium approached the most in a decade.

Yields on U.S. debt due in 10 years or longer climbed to more than 1.5 percentage points higher than counterparts around the world, based on Bank of America Merrill Lynch indexes. The premium was the widest since May 2006.

“There are significant yield differentials between U.S. bonds and foreign bonds,” said Tom DeMarco, a strategist in the bond division at Fidelity Capital. “Countries making up roughly one-quarter of the world’s gross domestic product are in some kind of negative-rate regime, which makes U.S. assets look fairly attractive,” he said in a report March 18 on the firm’s website. The company is the trading arm of Boston-based Fidelity Investments, which manages about $2 trillion.  

Treasuries are appealing to investors seeking alternatives from negative interest rates in Europe and Japan, while the Federal Reserve scales back forecasts for how much it will raise its benchmark for the U.S. amid mixed economic data. The Fed projects it will make two increases, dropping its outlook for four, because of weaker global growth and financial-market turmoil.

U.S. 10-year yields rose four basis points, or 0.04 percentage point, to 1.91 percent as of 9:17 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in February 2026 was 97 14/32.

Quarterly Performance

U.S. government securities have returned 2.6 percent in 2016, heading for their biggest quarterly gain since the April-to-June period of 2012, based on the Bloomberg U.S. Treasury Bond Index.

Investors shouldn’t underestimate the Fed, said Roger Bridges, the chief global strategist for interest rates and currencies at Nikko Asset Management Co.’s Australian unit, which oversees $15.2 billion. The danger to the bond market is that central bankers will seek to push rates up faster than traders expect if the economic data improve, he said.

“If the Fed is seen to be coming back -- that things are not as bad as many people are fearing -- that in itself may cause some disruption,” Bridges said. The current outlook for two increases this year means Treasury yields may be little changed through the course of 2016, he said.

The latest employment report showed the U.S. added more jobs in February than economists surveyed by Bloomberg projected, though wages declined. Existing-home sales fell in February, based on responses from analysts before the report Monday.

While the yield may rise past 2 percent, the advance will be limited by the outlook for economic growth and the Fed, Fidelity’s DeMarco said. 

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