Long bond rallies as QE inflation looks elusive

April 23 (Bloomberg) -- Lacy Hunt, whose bond fund has beaten 99% of its peers during the past five years by buying the longest maturity Treasuries, says 30-year government securities remain the world’s best debt investment.

“The long end of the Treasury curve offers the greatest value,” Hunt, the chief economist at Austin, Texas-based Hoisington Investment Management, which oversees more than $4.5 billion, said April 17 in a telephone interview. “The risk of deflation is greater than the risk of inflation over the next several years,” said Hunt, whose firm’s Wasatch-Hoisington U.S. Treasury Fund has returned 76% since April 2007.

While the U.S. economy is expanding, it isn’t sparking faster inflation, helping push bond yields and government borrowing costs back toward record lows following the worst selloff since 2010 during the first quarter. After losing 7.6% in January through March as consumer confidence, retail sales and jobs gained, the 30-year Treasury has returned 4.4% in April.

Falling yields on longer-maturity fixed-income securities signal renewed confidence in the ability of Federal Reserve Chairman Ben S. Bernanke to keep consumer prices in check even as the economy grows.

Real Yields

Inflation concerns are abating even after the Fed pumped $2.3 trillion into the financial system by purchasing bonds in a policy known as quantitative easing, or QE, and kept benchmark interest rates near zero since December 2008. Thirty-year bonds have the added benefit of paying a yield that is higher than the rate of inflation, unlike notes due in 10 years or less.

In the first quarter, “you had concern of the Fed providing too much lighter fuel on the barbecue for too long,” Jim Hannan, a senior money manager in Baltimore at Wilmington Trust Investment Advisors Inc., which oversees about $25 billion in fixed-income assets, said April 18 in a telephone interview.

Confidence in the Fed is also seen in the difference between 10- and 30-year Treasury yields, which is little changed since the central bank raised its assessment of the economy on March 13. That spread, at about 1.16 percentage points, typically widens as investors demand higher yields on longer maturity debt when they expect faster growth to spark inflation.

“All of a sudden the 30-year looks a little bit better,” Hannan said.

Falling Yields

After falling from the high this year of 3.49% on March 19, yields on 30-year Treasuries were little changed last week at 3.13 percent, according to Bloomberg Bond Trader prices. The yield was 3.08% at 8:48 a.m. New York time. The benchmark 3.125% bond due February 2042 rose 29/32, or $9.06 per $1,000 face value, to 100 28/32.

A year ago, the yield was almost 4.5 percent. It has averaged 7.19% since 1980 and compares with a trailing 12-month inflation rate of 2.7 percent.

The long bond served as a benchmark for governments and companies from when the Treasury began regular sales of the debt in 1977 until 2001, when then-Undersecretary for Domestic Finance Peter Fisher suspended auctions, saying they were too costly. Investors turned to the 10-year note as the market benchmark.

Expanding budget deficits led Treasury officials to resume 30-year sales in 2006. Offerings increased as the financial crisis worsened and tax receipts plummeted, causing the shortfall to reach $1.42 trillion in 2009.

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