Bargain bonds

December 19, 2014 03:36 AM
Treasuries rose for the first time in three days as yields at the highest levels in more than a week lured investors after the Federal Reserve said it’s on track to raise interest rates next year.

The difference between yields on U.S. 10-year notes and their Group of Seven peers was at almost the highest level in about eight years. U.S. yields rose this week as the central bank said Dec. 17 it will be “patient” on the timing of the first rate increase since 2006, replacing a pledge to keep borrowing costs at virtually zero for a “considerable time.” The U.S. is scheduled to sell $104 billion in fixed- and floating-rate notes next week.

“’Patience’ probably means the same thing as ’considerable time,’” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that trade with the Fed. “Rate hikes are subject to the economy. We’re data dependent.”

The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.19 percent at 8:56 a.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent note maturing in November 2024 added 5/32, or $1.56 per $1,000 face amount, to 100 1/2. The yield increased as much as 17 basis points during the two previous days, the most since July 2013.

Yield Difference

The gap between the yield and the average of the G-7 peers was 94 basis points, almost to the highest since 2007.

The Bloomberg U.S. Treasury Bond Index returned 5.8 percent in 2014 through yesterday, set for the biggest annual advance since 2011.

Fed Chair Janet Yellen is sending the world’s biggest bond market into gyrations and Pacific Investment Management Co. said there are more to come.

“The Fed confirmed they are very determined to move in the summer time, or may be as early as April,” said Scott Mather, one of the managers for the Pimco Total Return Fund, the world’s biggest bond fund. “The markets are a bit complacent, we think, about this new Fed regime in terms of thinking there is always going to be that Fed put,” he said on Bloomberg Television’s “First Up” with Angie Lau.

Pimco’s view differs from that of its co-founder and former chief investment officer Bill Gross who said the Fed may be constrained by disinflationary pressures after oil prices plunged in recent weeks.

Price Swings

An index measuring 10-day price volatility in the Treasury market rose to 5.23 on the same day, the highest level since August 2013. It was 5.19 yesterday. The gauge has averaged 3.14 in the past 12 months.

A plunge in the Russian ruble to a record low and a slide in oil prices that sent crude to its biggest loss in 2014 in six years helped drive volatility as investors sought the relative safety of government debt.

“The market has been volatile this week and there is going to be quite a significant increase in short-bond yields if the Fed does as they said they will do,” said Jussi Hiljanen, head of fixed-income research at SEB AB in Stockholm. “We maintain our prediction that the first rate increase will take place in September. Risks are certainly that they will hike less than they project at this point.”

German Bonds

The yield difference between 10-year Treasuries and their German counterparts rose to 1.6 percentage points today, the most since June 1999 as the European Central Bank is poised to add monetary stimulus.

The Fed is withdrawing monetary support as the U.S. economy recovers from a recession that began in December 2007 and ended in June 2009. Policy makers in October ended the bond purchases they had used to put downward pressure on borrowing costs.

The U.S. has the world’s biggest bond market, with $12.5 trillion of government debt. Japan is second with $8.36 trillion and the U.K. ranks third with $2.22 trillion.

“A lot of the volatility was caused by people preparing for what the Fed was going to say,” said John Gorman, head of dollar interest-rate trading for Asia-Pacific at Nomura Holdings Inc. in Tokyo. “If there are any big flows to come through, the market will be a bit whippy given the fact that liquidity is light” as the year ends, he said.

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