March 15, 2012 2:26 pm
Bond bulls caught in US Treasuries sell-off
All of a sudden, it is one-way traffic in the bond markets. US Treasury bonds, the choice asset of the cautious investor, are tumbling in prices. Yields on benchmark 10-year jumped on Thursday to five-month highs as the latest positive jobs news stoked hopes for economic recovery.
This sharp turnround in the world’s most liquid bond market has occurred within a matter of days. Only on Monday, bond yields were below 2 per cent. Now, amid a stock market rally that has taken equities to their highest levels since the before the global financial crisis, yields have topped 2.3 per cent. Bond bulls are getting nervous.
Until this week, and since last November, the yields on Treasuries had been confined near historic lows, stuck in a tight range. The view in the markets was that the Federal Reserve’s huge bond-buying programme under “Operation Twist” and prospect of “quantitative easing” to come would underpin demand for Treasuries, keeping yields, which move inversely to prices, at very low levels.
The extent of this week’s selling, then, suggests the bond market is at a crucial juncture. As evidence of economic recovery builds, and with the Fed dialling back on hints of further monetary easing, investors are reassessing that consensus trade. The question being asked is how long the US central bank will maintain ultra-loose policy to encourage the lending by banks deemed essential for recovery.
For some bond investors, notably Pimco, the rise in yields spells trouble. Pimco is among those that have recently bet yields will stay at very low levels for this year. Official data released on Thursday revealed that foreign investors and central banks were also big buyers of Treasuries in January and are now facing losses on those purchases.
That may well be the case. Indeed, Ben Bernanke, Fed chairman, will not want to see yields climb further as rising interest rates now could still kill off signs of economic revival and, moreover, derail the confidence-boosting rally in equities. It will not take long for the jump in yields to translate into higher mortgage costs at a time when the housing market remains firmly in the doldrums.
Eric Green, strategist at TD Securities, says: “This sell-off has legs, but not much more over the near term. Housing is the Achilles heel of the recovery and Bernanke is not about to let borrowing costs move too far against him.” Moreover, the sharp rise in petrol prices, now breaching $4 a gallon, will drag on the economy and could lead to a summer slowdown.
Martin Murenbeeld, chief economist at Dundee Wealth Economics, says: “The risk here is that a lot of people are now betting on this recovery, even though the Fed itself is saying the data is not that conclusive.
“All it will take is a weak US gross domestic product reading in April for ‘QE3’ talk be back to the table and yields to fall.”
Nevertheless, as evidence mounts that the US economy is picking up pace, the need for the Fed to undertake further easing via large-scale asset purchases lessens, removing a key prop for Treasuries. In turn, the risk grows that bond investors will capitulate and pour money into equities, and financials particularly, which are still cheaply valued.
There is scope for a Treasury correction. As it stands, this year’s 11 per cent rally in the S&P 500 leaves the benchmark at its best level since the summer of 2008. At that time, the yield on 10-year Treasuries briefly traded above 4 per cent.
Mike Materasso, senior vice-president at Franklin Templeton fixed income group, says: “There’s a great disconnect, if not the greatest disconnect, between Treasury yields and economic fundamentals.”
.
Investors are also mindful that the 10-year yield remains below the 2.9 per cent annual rate of inflation, entailing a loss of purchasing power for bond buyers at negative real yields.
Michael Kastner, principal at Halyard Asset Management, says: “The rule of thumb is that the 10-year yield should be 100 basis points over the current inflation rate, which suggests a yield closer to 4 per cent.”
Not helping matters is that March is usually a bearish time for US interest rates, as tax refunds buoy spending.
With foreigners accounting for half the Treasury market and some 70 per cent of of those holdings in the hands of official institutions, there are fears that the rise in yields could trigger further selling.
.
For now, the latest official data shows foreign buying is supportive. China, the largest foreign holder of Treasuries, in January added to its holdings, which rose from December’s $1.1519tn to $1.1595tn. Its holdings, though, had been falling and Beijing, if it added more in February, could become wary.
Much will depend on economic data and whether the Fed alters its long-term forecasts for interest rate policy at next month’s meeting. Already the bond market doubts the central bank can reiterate this week’s pledge of near zero overnight rates through to at least the end of 2014, let alone sanction QE3 should the jobs market improve further and inflation nudge higher.
Mr Green says: “Bernanke cannot press rates back to where they have been, that was the old policy regime. The new policy regime is to try to keep rates in a sweet spot of 2 per cent to 2.5 per cent for as long as possible.”
Copyright The Financial Times Limited 2012.
0 comments:
Publicar un comentario