2016 US Treasury rally eases after bonds become expensive
The 2016 Treasuries rally slowed this week on concern yields that fell to within about half a percentage point from a record low made the market too expensive for some investors.
Benchmark 10-year yields dropped as low as 1.94 percent this week, versus the record of 1.379 percent set in 2012, as investors sought safety in bonds amid a global stocks rout. Fukoku Mutual Life Insurance Co. is holding the money it receives from customers in cash, said Yoshiyuki Suzuki, head of fixed income.
"Cash is comfortable," said Suzuki, one of the investors for Tokyo-based Fukoku, which has $56 billion in assets. "Bonds are expensive."
The benchmark 10-year note
yield rose four basis points, or 0.04 percentage point, to 2.07 percent at 10:25 a.m. London time, based on Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 fell 10/32, or $3.13 per $1,000 face amount, to 101 5/8. The dividend yield on the Standard & Poor's 500 Index climbed to as much as 39 basis points more than Treasuries this week, the widest spread since May 2013.
Treasuries are headed for their first decline in three weeks while the Bloomberg U.S. Treasury Bond Index, which includes interest payments, earned 0.1 percent this week through Thursday. That compares with a 1.5 percent return in the first two weeks of January, when investors sought fixed-income assets as a haven and reduced expectations of further rate increases by the Federal Reserve.
The probability the Fed will increase its benchmark by its April meeting has dropped to about 31 percent, down from 56 percent at the end of last year, according to futures data compiled by Bloomberg. The central bank's Open Market Committee is set to announce its next rate decision on Jan. 27. "Treasuries are taking a pause for breath after the recent rally as investors await next week's FOMC meeting," said Nick Stamenkovic, a fixed-income strategist at Edinburgh-based broker RIA Capital Markets Ltd. Market rate expectations are "too sanguine in our view."
The U.S. government saw the lowest demand since 2008 at an auction of 10year Treasury Inflation Protected Securities on Thursday as inflation expectations have plunged this month along with oil prices.