Treasuries World’s Best Bonds as Fed Cites U.S. Growth Concern

By Kristine Aquino and Wes Goodman

Treasuries were the best-performing sovereign bond market this month as U.S. inflation expectations slid and the Federal Reserve said it was concerned slowing global growth risked damping the recovery.
U.S. government securities due in 10 years or more returned 2.3 percent since Sept. 30, the most among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. A gauge of U.S. inflation fell to a 15-month low yesterday. Treasury 30-year yields were near the least since May 2013 before a $13 billion auction of the debt today.
“I’m bullish on the 30-year bonds,” said Hajime Nagata, a Tokyo-based bond portfolio manager at Diam Co., which manages the
equivalent of $130 billion. “Inflation expectations are still subdued.”
The U.S. 10-year yield was little changed today at 2.32 percent at 6:50 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.375 percent note due in August 2024 was 100 15/32. The yield has declined 17 basis points, or 0.17 percentage points, this month.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 1.97 percentage points after falling to 1.91 percentage points yesterday, the lowest since June 2013.

Fed Minutes

A number of U.S. central bank officials said the nation’s expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” according to minutes of the Sept. 16-17 Federal Open Market Committee meeting released yesterday in Washington.
Policy makers also said they were concerned the “persistent shortfall” of euro-area growth and inflation may strengthen the dollar, which would hurt exports.
The U.S. 30-year yield was little changed at 3.05 percent after dropping to 3.04 percent yesterday, the lowest level since May 10, 2013.
The most recent auction of the bonds on Sept. 11 drew a bid-to-cover ratio of 2.67, compared with 2.6 in August. The ratio gauges demand by comparing total bids with the amount of securities offered,
A sale of 10-year notes yesterday had a bid-to-cover ratio of 2.52, the lowest since August 2013, Treasury data show.

‘Less Attractive’

“There wasn’t a lot of participation in the 10 year,” said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “I doubt there will be a lot of participation in the 30 year. At these levels it’s a little bit less attractive.” Nomura is one of the 22 primary dealers that underwrite U.S. debt.
The decline in yields is curbing demand for Treasuries, Gorman said. The extra yield 10-year U.S. notes offered over their Group-of-Seven peers shrank to 0.77 percentage point yesterday, the least since Sept. 3.
Japan’s 10-year yield fell 1.5 basis points to 0.485 percent, the lowest since Aug. 29. Australia (GACGB10)’s declined six basis points to 3.30 percent after dropping to 3.29 percent, the least since Sept. 1.
Treasury 10-year yields will climb to 2.74 percent by Dec. 31, according to the weighted average forecast in a Bloomberg survey. Traders see a 57 percent chance the Fed will raise its benchmark rate by September 2015, fed funds futures data compiled by Bloomberg showed yesterday.
“An inherently cautious Fed is still apparent, but the key is policy normalization will be data-dependent,” Oversea-Chinese Banking Corp. analysts including Selena Ling, an economist in Singapore, wrote today in a note to clients. “Our baseline scenario is still the Fed starts to hike the fed funds rate by mid-2015.”