Treasuries World’s Worst-Performing Bonds as Fed Turns Hawkish

  • U.S. debt returns 7% over two years, least among 26 markets
  • Treasuries still gain as U.S. yield premium attracts investors

Treasuries are the worst performers among developed bond markets in the past two years as the Federal Reserve raises interest rates, while other major central banks ease monetary policy.

U.S. government securities have returned 7 percent in the previous 24 months, the smallest gain of 26 bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries are also at the bottom of the ranks over three and five years. They’re still delivering positive returns as negative interest rates in Europe and Japan keep demand for U.S. yields alive.

Fed officials including the presidents of the central bank’s regional arms in San Francisco, Boston and Philadelphia have spoken this month in support of higher interest rates. A move would add to the Fed’s quarter-point increase in December. Chair Janet Yellen is scheduled to speak on May 27.

Treasuries were little changed Wednesday, with the benchmark 10-year yield at 1.87 percent as of 7:22 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 97 27/32.

“The Fed is expected to raise interest rates and we won’t see what we’ve seen in the past, with other central banks such as the European Central Bank and the Bank of England following suit,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “We expect on a 12 month horizon 10-year yields of 2.25 percent.”

For the latest Fed views on interest rates, click here.

The Fed is pushing its benchmark higher as the U.S. recovers from the recession that began in December 2007 and ended in June 2009. Central banks in the euro area, China and Japan -- the biggest economies after the U.S. -- are all going the opposite way, pursuing record monetary-easing programs to spur growth.

“You have to be cautious whilst we are in this period when interest rates will rise,” said Sandra Holdsworth, an Edinburgh-based money manager at Kames Capital, which oversees assets of about 58 billion pounds ($85 billion). “10-year Treasury yields are attractive above 2 percent but less attractive at 1.75 percent -- we are in just about the middle of the range.”

“I don’t think there’s going to be much of a rise in yields but at current levels it’s not really worth chasing them either,” she said.

Before it's here, it's on the Bloomberg Terminal.