Treasurys Rally Shows No Sign of Stopping
30 June 2016 - 10:59AM
Dow Jones News
By Min Zeng
After the biggest rally in U.S. government debt in six years,
many money managers and strategists say it still isn't time to bet
against Treasurys.
The yield on the benchmark 10-year Treasury note was recently at
1.477%, just a touch above its record closing low of 1.404% set in
July 2012. The yield was down from 1.784% at the end of March and
2.273% at the end of 2015, reflecting the biggest price gain since
the six-month period ended June 2010. Yields fall as bond prices
rise.
A sluggish global economy, the Federal Reserve's hesitance to
raise short-term interest rates and expansive monetary stimulus
overseas have ratcheted up demand for Treasurys this year. Yields
sank in the second quarter after the U.K.'s vote on June 23 to
leave the European Union, as investors worried that the political
and economic fallout from the so-called Brexit could hurt
cross-border trade and investments, curtail consumer and business
spending and reduce banks' earnings.
Ray Remy, head of fixed-income trading in New York at Daiwa
Capital Markets America Inc., said the 10-year Treasury yield could
fall to 1.275% in coming weeks if the flight-to-safety trade
intensifies.
Mr. Remy said he is monitoring banks shares in Europe and the
U.K., which have slumped following Brexit. The big worry is "the
health of European and British banking system," he said.
There are some signs that the bond market's rally may be getting
stretched. Hedge funds and money managers held $11.5 billion worth
of net wagers that prices of 10-year Treasury futures would rise,
according to Cheng Chen, U.S. rates strategist at TD Securities,
citing data from the Commodity Futures Trading Commission for the
week ending June 21. That was the highest since 2013.
In the latest weekly survey of global investors from J.P. Morgan
Chase & Co., released Tuesday, the number of investors betting
on higher bond prices outnumbered those expecting lower prices by
the most since December 2010.
Michael Collins, senior portfolio manager at Prudential Fixed
Income, which manages $621 billion, said he has booked some profit
from the price rally in the Treasury market in recent days and
picked up "some attractive" asset-backed securities that offer
higher yields than Treasurys.
Some others are buying investment-grade corporate bonds or
shares of utilities firms whose dividend yields are higher compared
with the 10-year Treasury yield.
Analysts have warned that piling into government debt,
especially long-term bonds, at such low yield leaves investors
vulnerable to potentially large losses if yields march higher.
But for many foreign investors, the U.S. Treasury market is one
of the only places left in the developed world where they can get
attractive income. Negative-interest-rate policy in Japan and
Europe has resulted in a record pool of negative-yielding sovereign
bonds. The yields on the 10-year government bonds in Germany, Japan
and Switzerland are all trading below zero.
"We are in uncharted territory" in terms of bond yields, said
Sean Simko, head of fixed-income portfolio management at SEI
Investments, which had $265 billion in assets under management at
the end of March. Mr. Simko said he bought Treasury debt in late
June.
Money managers say the Fed's cautious stance in raising interest
rates will help reduce the risk of a large rise in U.S. bond
yields.
Treasury bond yields rose in April and May as signs of a
resilient U.S. economy raised expectations for a rate increase in
the summer. But the odds have been retreating after the May
employment report showed the smallest pace of job growth in more
than five years.
Now with Brexit muddying the U.S. growth outlook, investors
believe that the Fed is unlikely to raise rates at all in 2016,
after raising rates in December for the first time since 2006.
Meanwhile, the rise of the dollar amid a weaker British pound,
euro and Chinese yuan could make it more difficult for the Fed to
push up inflation to its 2% target, reducing the central bank's
case for tightening monetary policy.
Fed-funds futures, a popular vehicle for investors to place bets
on the Fed's policy outlook, recently reflected a 16% chance of a
rate increase by the central bank's December meeting. That was down
from more than 40% in early June.
"It is a bit premature to completely rule out the potential for
a hike this year," said Michael Lorizio, senior trader at Manulife
Asset Management, which had $325 billion assets under management at
the end of March. "We need to digest some further information
before making a longer term forecast regarding how the recent
events in Europe will impact the domestic economy and central bank
activity."
The market started to show moderate odds that the Fed could
reverse to a rate cut in coming months, reflecting how investors
are worried about the Brexit's fallout on the U.S. economy.
"Uncertainty is very friendly for bonds and I think the price
rally will keep going for some time," said Aaron Kohli,
interest-rate strategist at BMO Capital Markets.
(END) Dow Jones Newswires
June 30, 2016 05:44 ET (09:44 GMT)
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