The longest decline in Treasuries this year has left U.S. government debt the cheapest since March 2011 when measured by real yields and the best relative value compared with German bunds in more than two decades.
After inflation, 10-year U.S. notes yielded 0.91% last week, or 1.77 percentage points more than real yields on U.K. gilts, the widest spread in 25 months. Versus Germany, the securities are the least costly in 23 years when adjusted for the recent record-low interest rates around the world that distorted the normal relationship, according to FTN Financial.
Federal Reserve Chairman Ben S. Bernanke is counting on Treasuries to contain borrowing costs as the central bank buys $85 billion a month in securities to sustain the economic recovery that lifted U.S. consumer confidence to the highest in almost six years. The better relative yield for U.S. bonds may help bolster demand even as Warren Buffett said this month that he pitied fixed-income investors because of about record-low interest rates.
“The Treasury market is cheaper than almost any other comparable market on a relative value basis,” Jim Vogel, an interest-rate strategist at FTN, said by phone May 15. “There is the thought out there that Treasuries are expensive when in reality they offer the most value given the improving economy and the relative real yield they offer compared to others.”
The Memphis, Tennessee-based firm has correctly been less bearish on bonds than consensus forecasts for the past two years. In May 2012, the firm’s chief economist, Christopher Low, said 10-year yields would fall to 1.5% from a then 1.79%. They hit that mark three weeks later, and fell as low as 1.38% in July. The rate fell three basis points to 1.92% as of 9:38 a.m. in New York.
Treasuries due in at least 10 years were yielding 40 basis points more than non-U.S. sovereign debt on May 16, according to Bank of America Merrill Lynch indexes. As recently as September, U.S. rates were lower than those for the rest of the world.
While yields on 10-year Treasuries rose to 1.95% last week, below the average of about 5% since 1990, they are 60 basis points, or 0.6 percentage point, higher than similar-maturity German bunds. That’s about double the average since 2003. They are five basis points more than gilts, versus an average of about 30 basis points below over the same period.