Treasury yield forecasts fall as notes remain little changed

Fiscal Cliff

Fed Vice Chairman Janet Yellen said on Jan. 5 in San Diego that central-bank communication of its policy aims plays a “big role” in supporting the economy now that its benchmark interest rate is close to zero. The same day, Fed Bank of Philadelphia President Charles Plosser said the Fed should take the steps necessary to ensure inflation stays near its goal of 2 percent.

The U.S. plans to sell $32 billion of three-year notes, $21 billion of 10-year securities and $13 billion of 30-year bonds over three days starting tomorrow. The amounts are unchanged from the last time the government issued this combination of securities in December.

Treasuries declined last week because of the Fed statement and after the U.S. averted the so-called fiscal cliff of tax increases and spending cuts.

Economic growth will probably be strong enough that money managers should favor higher-yielding assets over Treasuries, said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank as measured by market value.

Least Expensive

“The U.S. economy continues to recover,” Shimazu said. “Companies continue to hire. Riskier assets will be much more attractive than Treasuries in 2013: equities, commodities, real estate.”

The “outlook for risk assets is positive,” according to Jan Hatzius, chief economist in New York at Goldman Sachs Group Inc., another primary dealer.

“Longer-term interest rates may rise a bit further, but not to a degree that would undermine further price gains in the equity and credit markets,” Hatzius wrote in a note yesterday.

U.S. government securities were close to the least expensive levels in eight months.

The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.71 percent today. It was minus 0.68 percent on Jan. 3, the highest level since May.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average last year was minus 0.77 percent.

New Normal

Pacific Investment Management Co.’s new normal, the prediction that global economic growth and investment returns would tumble, is proving half right.

Bill Gross and Mohamed El-Erian, the co-chief investment officers of the Newport Beach, California-based company that oversees $1.9 trillion, correctly foresaw that global expansion would be sluggish. The world’s economy probably grew 2.2 percent last year, below the 3.2 percent average of the decade before the 2008 financial crisis, according to World Bank data compiled by Bloomberg.

Pimco’s outlook, announced in 2009, was less accurate for financial assets as unprecedented stimulus by central banks drove up demand for stocks and bonds. Fixed-income securities around the world returned more than the average of the past 16 years in 2012 and the value of global equities increased by $6.5 trillion as the MSCI All-Country World Index rose 13.4 percent.

Bloomberg News

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