Treasuries are falling in 2013 while high-yield bonds and stocks set records, reflecting demand for riskier assets as the Federal Reserve promises to stick to its program of quantitative easing to spur growth.
Government debt has slid 0.4 percent this year, versus a 2.1 percent gain for high-yield bonds, after accounting for interest, according to Bank of America Merrill Lynch indexes. The high-yield gauge rose to 971.9 yesterday, the most based on data that go back to 1986. The Dow Jones Industrial Average climbed to its highest level ever. Fed Chairman Ben S. Bernanke and Vice Chairman Janet Yellen both said over the past two weeks that the Fed should maintain stimulus efforts.
“There has been a pickup in confidence in Fed policy,” said Will Tseng, a fixed-income trader in Taipei at Mirae Asset, which oversees $50 billion. “High-yield and equities have outperformed because Bernanke and Yellen have said QE will continue until there’s a faster recovery in the U.S.”
Benchmark 10-year Treasury yields were little changed at 1.91 percent at 8:39 a.m. in London, according to Bloomberg Bond Trader data. The 2 percent note due February 2023 traded at a price of 100 27/32.
Japan’s 10-year government bond yielded 0.67 percent, after falling to 0.585 percent yesterday, the lowest level since 2003. The nation’s sovereign debt has returned 1.4 percent this year, based on the Bank of America indexes.
The Dow Jones Industrial Average returned 9.3 percent, according to data compiled by Bloomberg.
Yellen said this week central bank should continue its monthly bond buying while tracking the costs of the program. Bernanke in congressional testimony last week defended the Fed’s bond purchases, saying the benefits of reducing borrowing costs and fueling growth outweigh any potential costs.
The central bank is purchasing $85 billion of Treasury and mortgage debt a month to put downward pressure on borrowing costs. It has kept its benchmark target for overnight lending in a range of zero to 0.25 percent since 2008.
Federated Investors Inc. (FII:US), the Pittsburgh money manager with $379.8 billion in assets, “nudged up” high-yield bonds in its recommended portfolio allocations, Mark E. Durbiano, a senior portfolio manager, wrote on the company’s website this month. The improving U.S. economy and the strength of the nation’s companies will support the securities, the report said.
“We expect the good start to the year for high yield to continue,” Durbiano wrote.
The securities “will benefit” from Fed policy and slow but positive growth, Russ Koesterich, the global chief investment strategist at BlackRock Inc., wrote on the company’s website this week. The New York-based company is the world’s largest money manager with $3.8 trillion in assets.
High-yield bonds are those rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Mixed economic data are underscoring the need for stimulus.
U.S. companies added 170,000 jobs in February, following a 192,000 increase the previous month, economists forecast in a Bloomberg News survey before the report today from ADP Research Institute.
Factory orders probably fell 2.2 percent in January from December, a separate survey showed ahead of the Commerce Department figures. The Fed is scheduled to release its Beige Book report on the economy.
The Labor Department’s monthly jobs report March 8 may show the U.S. unemployment rate was unchanged at 7.9 percent in February, based on responses from economists.
Treasuries fell yesterday as a report showed U.S. services industries expanded at the fastest pace in a year.
Fed Bank of Richmond President Jeffrey Lacker and Bill Gross, who runs the world’s biggest bond fund, have voiced concern at what the central bank is doing.
Policy makers said central bankers are setting “unhealthy” precedents by expanding their involvement in credit markets, Lacker said.
The “scale and scope of credit-market interventions has set precedents” that will change the relationship between financial markets, financial institutions, the government and central banks, he said yesterday in Washington. Lacker does not vote on monetary policy this year.
Gains in financial markets won’t be justified unless economic growth picks up, said Gross, who runs Pacific Investment Management Co.’s $288.2 billion Total Return Fund. (PTTRX:US)
“We’re moving closer to irrational exuberance,” Gross said yesterday, speaking on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “We probably have to see a real growth rate in the United States of 3 percent or so to justify this type of enthusiasm.”
U.S. gross domestic product will probably expand 1.8 percent in 2013, versus 2.2 percent last year, based on a Bloomberg News survey of economists.
Gross raised the percentage of Treasuries in his fund to 30 percent in January from 26 percent in December, according to Pimco’s website. The company, based in Newport Beach, California, is a unit Munich-based insurer Allianz SE. (ALV)
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