Bloomberg News

Treasury Investors Cut Inflation Bets as Gross Warns

July 25, 2012

PIMCO Fund Manager Bill Gross

Bill Gross, fund manager at Pacific Investment Management Co.. Photographer: Tim Boyle/Bloomberg

Treasury investors cut bets on inflation to the least in six months and yields reached record lows as Bill Gross, who runs the world’s biggest bond fund, warned the U.S. economy may stop growing.

The difference between the rate on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 2 percentage points. It was the least since Jan. 4 and compares with an average of 2.15 over the past decade. The U.S. plans to sell $35 billion of five-year debt today, as slowing growth and Europe’s debt crisis fuel demand for the relative safety of Treasuries.

“The market is implying that there is deflation in the economy, that the U.S. economy will get weaker,” said Kevin Yang, head of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets.

Benchmark 10-year yields were little changed at 1.39 percent as of 1:50 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.75 percent security due in May 2022 was 103 10/32.

The rate dropped as low as 1.3824 percent, setting a record for the third straight day. Yields on five-, seven- and 30-year Treasuries also slid to all-time lows, with the rate on the U.S.’s longest bond dropping to 2.4502 percent.

Japan’s 10-year rate declined one basis point, or 0.01 percentage point, from yesterday’s closing level to 0.725 percent. It was 0.72 percent over the past two days, a level not seen since 2003.

Growth Outlook

A report from the Federal Reserve Bank of Richmond implies economic growth is “inching close to 0,” according to a Twitter posting from Pacific Investment Management Co.’s Gross, who is based in Newport Beach, California.

His $263 billion Total Return Fund (PTTRX:US) had 52 percent of its assets in mortgage-related debt, 35 percent in Treasuries and 13 percent in investment-grade corporates on June 30, according to Pimco’s website.

The Richmond Fed manufacturing index fell to negative 17 in July from a revised level of negative 1 in June, the bank reported yesterday.

Debt Auctions

The five-year notes being sold today yielded 0.555 percent in pre-auction trading, versus 0.752 percent at the last sale on June 27. Investors bid for 2.61 times the amount offered last month, the least in a year.

Primary dealers, the 21 companies that underwrite the U.S. debt, bought 54.1 percent of the securities, the most since February 2011. Indirect bidders, the category of investors that includes foreign central banks, purchased 35.1 percent, the least since the same month.

The U.S. sold $35 billion of two-year notes yesterday and plans to conclude this week’s auctions with a $29 billion sale of seven-year debt tomorrow.

Hontai’s Yang said he disagrees with the market. He set bets against Treasuries yesterday and predicts the U.S. economy will keep growing, he said.

Purchases of new U.S. homes probably climbed 0.4 percent in June from May to the highest level in two years, based on a Bloomberg News survey of economists before the Commerce Department reports the figure today.

Economists polled by Bloomberg predict a July 27 report on gross domestic product will show economic growth slowed to an annualized 1.4 percent in the second quarter from 1.9 percent in the first.

Inflation Expectations

U.S. consumer prices rose 1.7 percent in June from the year before, versus an average of 2.5 percent for the past decade, according to Labor Department data.

While yields show inflation expectations are falling, there’s no letup in demand for insurance against rising costs in the economy.

U.S. Representative Stephen Fincher, a Republican from Tennessee, said July 18 he’s concerned that Fed efforts to spur the economy will fuel inflation.

Investor demand for 10-year TIPS pushed yields on the notes down to negative 0.75 percent on July 23, a record low. TIPS have returned 6.2 percent this year, versus 3.2 percent for conventional Treasuries, according to Bank of America Merrill Lynch data.

Vanguard Group Inc., which oversees $1.83 trillion, is starting a short-term TIPS fund. It will be an option for investors seeking protection from inflation, the company, which is based in Valley Forge, Pennsylvania, said in a press release yesterday.

“Lower Treasury yields are possible,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $70 billion in assets. The U.S. economy “is clearly slowing. The situation is getting worse in Europe.” Inflation won’t become a problem, he said.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; mheath1@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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Companies Mentioned

  • PTTRX
    (PIMCO Total Return Fund)
    • $10.84 USD
    • -0.01
    • -0.09%
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