Treasuries Rise as Prudential Sees Yield Falling to Record-Low

  • U.S. yields will be `low and range bound,' Robert Tipp says
  • Pimco prefers Treasuries to lower-yielding AAA sovereign bonds

Benchmark 10-year Treasury yields may tumble to a never-before-seen 1.25 percent as investors seek alternatives to lower interest rates around the world, according to Prudential Financial Inc.

Treasuries rose on Wednesday as demand for the safest assets was fed by a decline in stocks and oil, as well as renewed investor concern about China. While the yield on 10-year Treasuries was less than half a percentage point from its record low reached in 2012, the securities offered a yield pick-up of 160 basis points over similar-maturity German bonds and about 188 basis points over Japanese government debt.

“We’re going to be low and range-bound,” said Robert Tipp, the head of global bonds and foreign exchange for the fixed-income division of Prudential, the second-largest U.S. life insurer. “This is an extremely low-interest-rate world. The higher-yielding products are going to be dominating,” he said on Bloomberg Television.

Ten-year yields will be in a range of 1.5 percent to 2 percent for most of the remainder of 2016, said Tipp, who is based in Newark, New Jersey. A decline to 1.25 percent would be the bottom end of the range, he said, breaking the previous low of 1.379 percent set in 2012. The yield was 1.75 percent Wednesday.

Pacific Investment Management Co. said it likes Treasuries compared with lower-yielding AAA sovereign bonds. Germany’s 10-year bond, which carries the top rating, yields 0.16 percent. In Japan, which has a lower rank, the 40-year yield dropped to a record 0.3 percent.

Global Outperformer

The 10-year Treasury note yield fell one basis point, or 0.01 percentage point, to 1.77 percent as of 6:50 a.m. in New York. The 1.625 percent security due in February 2026 rose 1/8, or $1.25 per $1,000 face value, to 98 22/32, according to Bloomberg Bond Trader data.

U.S. debt has returned 0.7 percent in the past month, beating the next five biggest debt markets, which are Japan, Italy, the U.K., France and Germany, according to Bloomberg World Bond Indexes. The Fed raised its benchmark interest rate in December and Chair Janet Yellen signaled the central bank will take a slow approach to policy tightening.

“Treasuries are a tad rich, driven by the global grab for yield in high-quality paper,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “That said, with one Fed hike done and the Fed is on a much less hawkish path, and with some downside economic risk having materialized, the opportunity for a significant sell-off is much lower.”

In July, when the 10-year yield was around 2.35 percent, Tipp predicted a path of stable to lower U.S. yields. The benchmark went on to fall to almost 1.5 percent in February.

Fund Returns

The Prudential Total Return Bond Fund has returned 0.9 percent in the past year, beating 66 percent of its competitors, based on data compiled by Bloomberg. Prudential manages $1.2 trillion in assets, according to its website. It’s the largest U.S. life insurer behind MetLife Inc., the data show.

Pimco, with $1.5 trillion under management, said it’s also “cautious of the risks of rising rates” given how low they are. The comments were in a report Tuesday by Mihir P. Worah and Geraldine Sundstrom.

The Pimco Total Return Fund has returned returned 0.2 percent in the past 12 months, lagging behind about two-thirds of its peers, based the data compiled by Bloomberg.

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