Yields don’t reflect the improving U.S. economic outlook, according to Paris-based Carmignac Gestion SA, which oversees $70 billion. Policy makers on June 19 raised their growth forecasts for next year to a range of 3% to 3.5% and reduced their prediction for unemployment to as low as 6.5%. The growth forecast is higher than the 2.7% expansion estimate of economists in a Bloomberg News survey.
Employment increased more than forecast in June, with payrolls climbing by 195,000 workers for a second straight month, the Labor Department reported on July 5.
“U.S. rates are going to normalize and will grind higher,” Sandra Crowl, a member of Carmignac’s investment committee, said in a phone interview on July 3. “Rates in the U.S. as they stand currently are too low for the growth level, because of the effect of the quantitative easing.”
The money manager expects 10-year rates to rise to about 3% by the end of the year and owns a smaller percentage of Treasuries than is recommended by its benchmarks, she said.
With yields this low, some investors say returns on Treasuries will remain suppressed for years to come, ending the three-decade bull market in bonds. The rate on 10-year notes is less than half the 6.4% aggregate earnings yield of stocks in the Standard & Poor’s 500 Index and the gap is about double the average of 1.9 points since 2000.
Evidence of a U.S. economic recovery has dimmed the allure of government assets and may trigger further bond funds outflows, said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. U.S. consumer confidence climbed in June to the highest level in more than five years. Home prices have increased 12% since April 2012, according to the S&P/Case-Schiller Composite Index.
“The biggest risk to the bond market right now is continued outflows from mutual funds and ETFs,” Ellenberger said in a phone interview on July 5. “The outflow in June might only be the tip of the iceberg.”
Ellenberger said if retail investors continue to sell bonds to cut duration, a move aimed at reducing an impact of higher interest rates on bond investments, yields will climb further.
Bulls say Treasuries will remain attractive because they form the world’s most liquid pool of securities. The $10.5 trillion market compares with $1.8 trillion in Germany and Britain. Primary dealers traded $504 billion of U.S. government debt the week ended June 13, according to Fed data. Daily turnover of French government bonds was around $18 billion.
China’s holdings of U.S. government securities rose 157% since the start of 2008 to $1.3 trillion, or 22% of total U.S. government securities owned by foreigners, according to the most recent data compiled by Bloomberg. Japan’s $1.1 trillion was up 88% from five years ago.
Analysts forecast Treasuries will rally from current levels. Ten-year note yields will drop to 2.41% by year- end, according to the median forecast of 78 strategists surveyed by Bloomberg.