Benchmark U.S. 10-year notes yielded 102 basis points more than similar-maturity German bonds on July 5, the most since July 2006. The spread with U.K. gilts rose to 25 basis points on July 5. As recently as January, U.S. Treasuries yielded 23 basis points less than British government bonds.
“Yields are now getting closer to a level that we are comfortable with,” Willem Sels, the London-based U.K. head of investment strategy at HSBC Private Bank, said in a July 3 phone interview. “Treasury rates may head higher in a longer run, but we don’t envisage a bond bear market scenario. We are not as optimistic as the Fed in terms of growth outlook. Therefore, we think that it’s likely the extreme spike is behind us.”
While the Fed may be preparing to cool quantitative easing asset purchases, other central banks are ready to step up stimulus. European Central Bank President Mario Draghi said last week that there are no plans to end its low-rate policy until economic recovery is assured. The Bank of Japan announced plans to double the monetary base in two years.
The ECB kept its benchmark interest rate at 0.5%. In the U.S., the Fed’s target for overnight loans between banks has remained at zero to 0.25% since the end of 2008.
“We interpret this tremendous increase in yield as an overreaction to Bernanke’s statement,” Yusuke Ito, a money manager at Mizuho Asset Management in Tokyo, said in a phone interview on July 2. The Fed said “it will slow down quantitative easing, not raise interest rates,” Ito said. “The market is expecting an interest-rate hike to come soon. We don’t think that is going to happen. We are positive on Treasuries.”
MEAG Munich Ergo Asset Management GmbH’s Reiner Back, who helps oversee $305 billion as head of fixed income and foreign exchange in Munich, said July 3 that he remains positive on Treasuries. The increase in yields has “re-established value,” he said.
Deutsche Asset & Wealth Management in Frankfurt favors shorter-term notes, betting that subdued inflation will deter the Fed from raising rates before 2015. Amundi Asset Management, which has an equivalent of $970 billion in assets, said it would consider 10-year Treasuries “on a tactical basis” if yields approach this year’s highs.
The threat of reduced bond buying by the Fed caused the $10.5 trillion Treasuries market to lose 2% in May, the worst month since December 2009. It fell another 1.3% in June, according to a Bank of America Merrill Lynch index.
Investors who poured $1.26 trillion into bond funds in the past six years pulled $70.8 billion from mutual funds, typically owned by individuals, last month through June 27, according to TrimTabs Investment Research. They withdraw $9 billion from exchange-traded funds, which both institutional and private investors buy, in the same period.
Japanese investors sold a record 3 trillion yen ($29.7 billion) in May, figures from the nation’s Ministry of Finance showed today, the most in data going back to 2005.