Treasuries Buyers Go Long as Favored Fed Inflation Gauge Misses

  • U.S. 30-year bonds outperform, flattening yield curve
  • Fed’s Powell says Brexit shifts global risks to the downside

With interest rates across the globe near record lows, investors are finding yields attractive in the longest-dated corner of the $13.4 trillion Treasuries market.

The yield on 30-year Treasuries touched the lowest since February 2015 as data showed a measure of inflation preferred by the Federal Reserve fell short of forecasts. The yield difference between 30-year bonds and debt due in two years is the lowest since 2008, and the spread with five-year notes is approaching the narrowest this year.

Treasuries are heading for their biggest back-to-back quarterly advance in more than four years, with the rally snowballing last week in a flight to the safest assets after the U.K. voted to leave the European Union. Even as yields approach record lows, Treasuries remain alluring to investors compared with sovereign debt in countries such as Japan and Switzerland that offers negative yields across almost all maturities.

“Certainly the U.S. Treasury curve actually has more room to flatten,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee. “To the extent that overseas investors are looking for any way to take advantages in the U.S. market that aren’t available elsewhere, the 30-years could see outsized flows.”

Yield Pickup

The yield on 30-year Treasuries fell one basis point, or 0.01 percentage point, to 2.26 percent as of 1:01 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.5 percent security due in May 2046 was 105 6/32. 

Benchmark 10-year note yields were little changed at 1.46 percent, while two-year yields rose one basis point to 0.62 percent.

The yield pickup on U.S. 30-year bonds relative to two-year notes is 164 basis points, the least since January 2008. That’s still four times as wide as the equivalent yield curve gauge in Japan and nearly double the spread in Switzerland. Longer-dated debt tends to be more sensitive to expectations for inflation and economic growth, while shorter-dated notes are more influenced by the outlook for monetary policy.

Fed Governor Jerome Powell said Tuesday global risks have shifted further to the downside after Britain’s vote to exit the European Union, introducing new uncertainties that may merit reassessing monetary policy.

Inflation Gauges

“The headwinds for the global economy in general have now been magnified with the Brexit,” said Colin Robertson, who oversees $350 billion as head of fixed income in Chicago at Northern Trust Asset Management. “We like the longer part of the yield curve. I believe rates are headed lower, not higher, and I believe they’re going to be lower than market participants are forecasting.”

The 10-year Treasury yield will likely fall to 1 percent sometime in 2016, and 30-year bond yields may drop to 1.65 percent as inflation remains in check, Robertson said.

A measure of spending known as personal consumption expenditures, which is preferred by U.S. policy makers, rose 0.9 percent in May from the same time in 2015, below projections of 1 percent, according to data released Wednesday by the Bureau of Economic Analysis. It hasn’t met the Fed’s 2 percent goal since April 2012. Inflation erodes the value of long-dated bonds.

The 10-year break-even rate, or the difference between yields on 10-year notes and equivalent Treasury Inflation-Protected Securities, rose one basis point to 1.41 percentage point. A bond-market gauge of the expected annual inflation rate over the next decade, it fell on June 27 to the lowest since February.

The Bloomberg U.S. Treasury Bond Index has returned 5.5 percent since the end of 2015, the most since the combined third and fourth quarters of 2011. Bank of America Corp.’s index of U.S. debt shows the market is off to its best first half of a year since 1995.

“The increasingly uncertain outlook for the global economy, and the Fed’s reluctance to tighten, and investors’ desire for yields remain key support factors,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Treasuries may have taken a pause in the past few days, but I see renewed rise in risk aversion pushing 10-year yields toward 1.25 percent, if not lower.”

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