Treasuries’ Selloff Momentum Slows as Bond Bulls See a Rebound

  • U.S. debt pares losses as yields end week little changed
  • Morgan Stanley, Sri-Kumar predict yields falling to fresh lows

Treasuries pared losses, with 10-year note yields ending the week near where they started, in a win for bond bulls who bet that the biggest selloff in a year wouldn’t last even amid upbeat U.S. economic data.

The benchmark yield moved the least in either direction in eight weeks, after rising by the most in a year one week ago. Yields have climbed from all-time lows touched earlier this month as a flurry of above-forecast data has sent Citigroup Inc.’s U.S. Economic Surprise Index to the highest since December 2014. That’s caused traders to boost wagers on a Federal Reserve interest-rate increase this year to the highest in about a month.

The stalled Treasuries selloff supports the forecasts of Matthew Hornbach at Morgan Stanley and economist Komal S. Sri-Kumar, who this week called for 10-year U.S. yields of 1 percent or lower in the coming nine months. They say the signs of domestic economic strength can’t last, and that a business activity survey showing a “dramatic deterioration” in the U.K. economy after the vote to leave the European Union will help keep the Fed from raising rates.

“You have had some positive data, but we’ve always had some positive and some negative data going back all the way to 2009 -- we haven’t been able to sustain the good news,” Sri-Kumar, the president of Sri-Kumar Global Strategies Inc. in Santa Monica, California, said in an interview on Bloomberg Television. The U.K. finding “means that the yield is going to go down in the U.S., and that’s where your bargains are going to be.”

Yield Reversal

The U.S. 10-year note yield increased one basis point, or 0.01 percentage point, to 1.57 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 100 1/2. The yield rose about two basis points this week, the smallest move up or down since the period through May 27.

Though still near the all-time low of 1.32 percent touched July 6, yields on 10-year Treasuries eclipse those on similar-maturity obligations of 17 other developed-market economies tracked by Bloomberg. Japanese 10-year debt yielded negative 0.24 percent Friday, while German notes yielded negative 0.03 percent.

Japanese investors rushed into foreign debt for a second week, government figures showed. Fund managers in the Asian nation bought a net 1.72 trillion yen ($16.2 billion) of medium- and long-term debt abroad in the seven days ended July 15, the Ministry of Finance said. They bought a record 2.55 trillion yen of debt the previous week, based on data on the ministry website that go back to 2005. MOF figures show Treasuries are their favored assets.

Fed Outlook

“When you look at yields in Japan, you’re talking about yields that are 100 basis points lower than where they were in 2012,” Hornbach, Morgan Stanley’s head of global interest-rate strategy, said on Bloomberg Television. By contrast, 10-year Treasuries are back above their lows from four years ago. 

“So you can start to see why investors in Japan who are dealing with extremely low interest rates are coming to the U.S. to enjoy the higher yield that are offered here,” he said.

Morgan Stanley doesn’t expect the Fed to change its benchmark rate for at least the next 18 months -- a contrast with the 75 percent implied probability of a hike by the end of 2017 assigned by the futures market.

Even if the central bank does diverge from global monetary easing, longer-dated Treasuries can rally, Hornbach said. The yield difference between five-year and 30-year U.S. debt remains above the average since 1992, Bloomberg data show.

“We have global economies slowing in terms of their growth, and we think core inflation will remain below central bank targets,” he said. “That’s the real issue here when you’re talking about longer-term Treasury yields.”

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