The U.S. expansion has been strong enough to lead investors to favor corporate bonds over government securities as they seek higher yields.
Treasuries have returned 1.4 percent this year, according to Bank of America Merrill Lynch data. Bonds in an index of investment-grade and high-yield corporate securities gained 10 percent, the figures show.
“I’m not buying at this low yield level,” said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $71 billion in assets. The economy is “not good, but it’s not so bad. Consumer spending will continue. Inflation expectations are increasing.”
The Citigroup Economic Surprise Index, which shows whether U.S. data beat or fell short of forecasts, rose to 55.5 on Oct. 15, the most since February. It was at 51.7 yesterday.
The Fed’s measure of inflation expectations, the five-year, five-year forward break-even rate was 2.84 percent on Oct. 23, after rising to 2.88 percent last month, the most since August 2011. The gauge projects the expected pace of consumer price increases over the five-year period beginning 2017.
The central bank said on Oct. 24 it will maintain its $40 billion in monthly purchases of mortgage-backed securities aimed to cap borrowing costs. “Economic activity has continued to expand at a moderate pace,” it said in a statement.
The Fed is also swapping short-term Treasuries in its holdings for longer-term securities to put downward pressure on borrowing costs. The central bank plans to buy as much as $2 billion of securities due from November 2022 to February 2031 today, according to the Fed Bank of New York’s website.
Franklin Templeton, which oversees $749 billion, favors Treasuries following the rally in higher-risk bonds, said Michael Materasso, co-chairman of the company’s fixed-income policy committee.
The fiscal cliff and the election are also are also reasons to seek safety, he said yesterday on Bloomberg Television’s “First Up” with Susan Li. The fiscal cliff refers to $607 billion in federal spending cuts and tax increases scheduled to take effect in January unless the U.S. Congress acts.
“We have been taking some risk off the table, and at least for now, we have been going into Treasuries,” Materasso said.
U.S. 10-year yields will drop to 1.74 percent by year-end, according to a Bloomberg survey of economists with the most recent projections given the heaviest weightings. The rate will rise to 2.34 percent by the close of 2013, the responses show.