Goldman Asset Management, Pimco See Treasuries Falling at QE End

By Kristine Aquino and Eshe Nelson

Goldman Sachs Asset Management and Pacific Investment Management Co. say Treasuries are poised to fall as the Federal Reserve approaches the end of its bond-buying stimulus program.
The completion of the Fed’s quantitative easing plan may add interest-rate risk to U.S. debt, paving the way for possible declines in Treasuries, said Philip Moffitt, head of fixed income for Asia and the Pacific at Goldman Sachs Asset in Sydney. Investors will demand a concession to buy longer-dated debt as the Fed withdraws from a market where it bought 41 percent of this year’s gross issuance of Treasuries due in more than 20 years, Pimco said in a report.
“Effectively duration is being added into the market” each month as the Fed’s bond purchases come to an end, Moffitt said today in a Bloomberg Television interview. “There’s not been enough concentration on what that addition of duration means to
the supply and demand balance in the market and we actually think that’s likely to have as big an impact as anything else.”
The U.S. 10-year yield was little changed at 2.41 percent as of 6:54 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.375 percent note due in August 2024 was at 99 22/32. The rate fell to 2.38 percent on Oct. 1, the lowest level since Sept. 4.

Higher Yields

Goldman Sachs Asset sees benchmark Treasury yields increasing to around 4 percent by the end of next year, Moffitt said in an interview with John Dawson on Bloomberg Television’s “On the Move.”
Steve Rodosky, a portfolio manager at Pimco, said in a report published on the company’s website that an improving U.S. economy will help send yields on the longest-dated securities “moderately” higher in the near term, while expecting them to find support around current levels in the long term.
The Fed will publish the minutes of its Sept. 16-17 meeting tomorrow. Policy makers raised their median estimate for the benchmark federal funds rate last month to 1.375 percent at the end of 2015, compared with a June forecast of 1.125 percent.
Officials also cut monthly bond purchases to $15 billion in a seventh consecutive $10 billion reduction, staying on course to end the program in October. They kept their pledge to maintain interest rates near zero for a “considerable time” after the asset buying stops.

Fed Speakers

The extra yield investors demand to hold U.S. securities due in a decade over two-year notes was about two basis points from the narrowest in five weeks before New York Fed President William C. Dudley speaks on the economy today and Minneapolis Fed President Narayana Kocherlakota discusses monetary policy.
Dudley will talk about the regional and national economy in Troy, New York. He said last month a too-strong U.S. currency may hurt the Fed’s goal to spur growth and avoid disinflation. Kocherlakota will speak in Rapid City, South Dakota.
“We’ve gone a long way through QE tapering and we still haven’t seen much upward pressure on yields,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Bank in London. “My suspicion is that it will be a more gradual increase over time in yields because even when the QE has finished, the forward guidance will remain very much in place.” The 10-year rate will be at 2.75 percent at year-end, he said.
Treasuries have gained in the past month amid signs of slowing global growth, including data today that showed German industrial production declined in August the most since 2009.
The extra yield investors get for holding 10-year securities instead of those due in two years was little changed at 188 basis points. The spread contracted to 186 basis points on Oct. 1, the narrowest since Sept. 2.

Bond Returns

An index of U.S. government debt due in 10 years or more has returned 1.8 percent in the past month, the best-performer among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
“It will be unusual for the Fed to do a lot of tightening in a scenario where global growth is patchy,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “Treasury 10-year yields will probably end the year around 2.50 percent, particularly if U.S. data follows European and global data down.”
The U.S. will sell $27 billion of three-year notes today, $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on Oct. 9. The most recent sale of three-year Treasuries, on Sept. 9, drew a bid-to-cover ratio of 3.17, compared with an average of 3.35 at the previous 10 auctions.