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Treasuries Fall as BlackRock Expects Losses for Long-Dated Debt

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  • Money manager predicts negative returns over next five years
  • Return expectations near post-crisis lows: BlackRock's Turnill

BlackRock Inc. says it expects losses for long-dated U.S. government securities and euro-zone debt over the next half decade as high bond prices and low interest rates limit returns.

The $4.65 trillion money manager said investors will have to accept higher volatility and reduced liquidity to generate returns in an era of negative global interest rates. Treasuries fell for a second day Tuesday, after Federal Reserve Bank of New York President William Dudley on Monday called U.S. economic news “mostly favorable” and cited improvement in Europe’s growth outlook.

“We now anticipate negative returns over the next five years from assets such as long-dated Treasuries and euro-zone bonds,” Richard Turnill, global chief investment strategist at BlackRock, wrote in a report published Monday. “We see a wider gap between the prospective returns for safe-haven and risk assets, reflected in higher expected returns for equities versus bonds.”

Investors skeptical about the outlook for economic growth and inflation have bolstered demand for fixed-income assets, propelling Treasuries maturing in 10 years or more to a 7 percent return this year, according to data compiled by Bloomberg. Bond yields worldwide have plunged as central banks in Europe and Japan implemented negative interest rates to boost flagging economies, pushing investors into longer-dated debt and toward the higher comparative yields offered by U.S. securities.

Return Expectations

Benchmark 10-year Treasury note yields increased one basis point, to 1.78 percent as of 6:56 a.m. in London. The price of the 1.625 percent security due in February 2026 fell 2/32, or 63 cents per $1,000 face amount, to 98 19/32. Yields on 10-year Treasuries have dropped by almost 50 basis points this year.

Hedge funds and other large speculators reduced bets on declines in Treasuries last week, in the biggest bullish shift since February. Net short positions in 10-year futures contracts dropped to 24,364 as of April 12, from a five-month high of 117,305 net positions a week earlier, based on the latest data from the U.S. Commodity Futures Trading Commission.

Japanese debt rallied after an auction of five-year notes, with the yield on the nation’s 30-year securities dropping to an unprecedented 0.335 percent.

More Bullish

BlackRock’s Jeffrey Rosenberg, the New York-based chief investment strategist for fixed income has been more bullish on the sovereign securities. Higher yields compared with other markets make long-term Treasuries attractive, he said last week.

The BlackRock Investment Grade Bond Portfolio has returned 0.7 percent in the past year, outperforming about half of its peers, according to data compiled by Bloomberg.

The yield on the U.S. 30-year bond, the security most sensitive to inflation expectations, rose as much as five basis points to 2.61 percent Monday after Dudley, in remarks posted on the Fed’s website, said he’s confident that inflation will return to the central bank’s 2 percent target “as the labor market tightens further and the transitory factors that have held inflation down dissipate.” He also said monetary-policy adjustments “are likely to be gradual and cautious, as we continue to face significant uncertainties and the headwinds to growth from the financial crisis have not fully abated.”

Fed Outlook

Fed policy makers last month left rates unchanged and trimmed forecasts for the number of increases in 2016 to two from four, after lifting off from near zero in December. The International Monetary Fund last week cut its estimates for U.S. growth. Futures suggest about a 14 percent probability that the Fed will tighten policy at its June meeting, down from about 75 percent odds on Jan. 1.

Looking at five-year expectations across asset classes, BlackRock’s Turnill wrote that “many of our return assumptions are now at or near post-crisis lows, with many expected returns below historical averages. These assumptions reflect high current valuations and lower global growth over the next five years, in line with a long, flat U.S. recovery.”