Treasury-Bund Yield Spread May Double This Year, F&C Says
March 10, 2010, 7:09 AM ESTMarch 10 (Bloomberg) -- The premium investors demand to hold Treasuries over German bunds may double in 2010 as Europe’s central bank is forced to keep interest rates on hold while the Federal Reserve prepares to tighten, F&C Netherlands BV said.
Economic recovery in the U.S. may drive 10-year Treasury yields 100 basis points above equivalent-maturity bunds as concern over sovereign-debt risk in Europe helps hold down bund yields, said Michiel de Bruin, who helps manage $28 billion of assets as head of European government bonds at F&C in Amsterdam. He declined to say what securities he was buying or selling. The spread was little changed at 57 basis points, the most since June 2007 based on closing prices, as of 11:15 a.m. in London.
“Things could normalize in the U.S. faster in regards to the economy and monetary policy,” de Bruin said in a telephone interview yesterday. “We are positioned in the expectation the spread will widen out further, maybe to 75 or 100 basis points on a medium-term basis.”
German government bonds returned investors 3.4 percent in the last six months, compared with 1.2 percent for Treasuries on speculation that the U.S. economic recovery will be stronger than in the euro region. Greece’s budget crisis has prompted investors to question whether other governments may have trouble servicing their debt.
The U.S. economy will expand 3 percent this year and the same again in 2011, compared with 1.2 percent and 1.5 percent in the euro region, according to the median of economist estimates compiled by Bloomberg.
F&C oversees the oldest U.K. investment fund. It had almost 100 billion pounds ($149 billion) of assets under management at the end of last year, according to results released today.
Debt Servicing
Euro-region officials are haggling over how best to help struggling members of the bloc, such as Greece, with European leaders proposing the establishment of a lender of last resort. European Central Bank members Axel Weber and Juergen Stark have warned against the creation of such an institution, citing potential moral hazard.
Greece is struggling to convince investors that it can cut a budget deficit that was more than 4 times the European Union’s 3 percent limit in 2009. Investors are demanding a premium of 309 basis points to hold 10-year Greek government bonds over German bunds, up from 115 basis points in September last year. The Portuguese-German yield spread is 90 basis points, and the Spanish-German spread is 69 basis points.
The U.S. government lent, spent or guaranteed more than $8.2 trillion by the end of 2009 to end the longest recession since the 1930s, data compiled by Bloomberg show. The U.S. Federal Reserve cut its main interest rate to as low as zero and bought $300 billion of Treasuries and $1.25 trillion of mortgage-backed securities, while the ECB reduced its rate to 1 percent and started buying 60 billion euros ($81 billion) of covered bonds.
“The current spread is justified,” de Bruin said. “The stimulus program in the U.S. was enormous, while in Europe it was only significant.”
--With assistance from Gabi Thesing in London. Editors: Keith Campbell, David Clarke.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
