Unreal yields see Gross trumpet real assets

Treasuries climbed, with five-, 10- and 30-year yields sliding to records, as concern mounted that Greece’s failure to meet bailout targets may worsen the European debt crisis, stoking demand for the safest assets.

The yield on the 10-year note plunged below the old mark set June 1 before the meeting tomorrow of Greece’s troika of international creditors, while the cost of insuring Spain’s debt rose to a record and the nation’s stock-market regulator banned short selling. U.S. government debt extended last week’s rise before reports this week forecast to show growth cooled. The Federal Reserve plans to buy as much as $5 billion of Treasuries today.

“It’s the European story,” said David Ader, head of U.S. government-bond strategy at CRT in Stamford, Connecticut. “Greece presumably is going to have to exit the euro. With the troika meeting tomorrow, there’s a real sense they will come away with nothing. And that’s being reflected in the downward pressure in yields and in the euro.”

The benchmark 10-year yield fell five basis points, or 0.05 percentage point, to 1.41 percent at 9:07 a.m. in New York. The 1.75 percent note due in May 2022 rose 14/32, or $4.38 per $1,000 face amount, to 103 3/32. The yield fell to as low as 1.3960 percent, with the five-year rate dropping to 0.5411 percent and the 30-year yield sliding to 2.4752 percent.

The 10-year record compares with an average of 3.76 percent over the past 10 years, according to data compiled by Bloomberg.

Global Records

Valuation measures show U.S. sovereign securities are at the most costly levels ever. The term premium, a model created by economists at the Fed, surpassed negative 1.01 percent, the all-time most expensive. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasuries returned 1.2 percent this month after a 0.4 percent loss in June, according to Bank of America Merrill Lynch indexes.

Ten-year U.K., Finnish and Canadian rates fell to the lowest on record, as did German two-year note yields. Japan’s five-year yield slid to the least since 2003.

German bunds advanced after El Pais reported, without citing anyone, that six Spanish regions may ask for aid from the central government, and speculation grew that Greece will miss its bailout targets. German government bonds handed investors a 2.6 percent return this month, according to Bank of America Merrill Lynch indexes.

Credit-default swaps on Spain jumped as much as 31 basis points to 636, according to data compiled by Bloomberg, and were at 632 at 1:30 p.m. in London. A basis point on a swap protecting 10 million euros ($12 million) of debt from default for five years is equivalent to 1,000 euros a year. Yields on 10-year bonds surged over 7.5 percent. By Emma Ross-Thomas

Greek Meeting

A three-month ban was placed on trades that “constitute or increase net short positions on shares” in the Spanish market due to “extreme volatility” in European markets, the regulator wrote in e-mailed statement.

Greece will host a visit beginning tomorrow from the troika of international creditors — the European Commission, the European Central Bank and the International Monetary Fund. The nation is struggling to meet obligations tied to the 240 billion euros of rescue funding it has received over the past two years as efforts to reduce its debt to 120 percent of gross domestic product by 2020 fall short.

Gross’s View

Figures from London-based Markit Economics scheduled for tomorrow will show a composite index based on a survey of purchasing managers in manufacturing and services in the euro area was unchanged at 46.4 this month from June, according to economists in a Bloomberg survey. A reading below 50 indicates contraction.

The U.S. economy grew at an annualized 1.4 percent in the second quarter, according to a Bloomberg News survey before the Commerce Department report on July 27. That would be the slowest pace since the period ended June 2011 and compares with a 1.9 percent rate in the first quarter of this year.

Bill Gross, who runs the world’s top bond fund at Pacific Investment Management Co., wrote on Twitter that real assets are a “better bet” amid negative real interest rates.

Investors may be able to maintain purchasing power with real assets, Gross wrote. Real assets include inflation-linked bonds, commodities, real estate or some combination of those assets, according to the company’s website. Gross’s $263 billion Total Return Fund had 52 percent of its assets in mortgage- related bonds and 35 percent in Treasuries as of June 30, the website showed.

Fed Meeting

The cost of living in the U.S. rose 1.7 percent in June from a year earlier, according to a July 17 report. The difference between the consumer-price rate and the 10-year Treasury yield, the so-called real yield, was minus 29 basis points at the note’s current level.

The Federal Open Market Committee next meets on July 31 and Aug. 1. While policy makers refrained from introducing a third round of asset purchases at their meeting last month, central bank Chairman Ben S. Bernanke indicated in two days of testimony in Washington last week that it’s an option.

The Fed plans to buy up to $5 billion of Treasuries due from July 2018 to May 2020 today as part of a program known as Operation Twist, in which it swaps short-term bonds in its holdings for longer maturities to push long-term borrowing costs lower.

The central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, seeking to stimulate the economy. The benchmark rate has been in a range between zero and 0.25 percent since December 2008.

BlackRock, Glenmede

The world’s biggest fixed-income investors are increasing holdings of corporate debt as a haven from the negative real yields on government debt from the U.S., the U.K. and Germany.

BlackRock Inc. (BLK), Glenmede Corp. and at least four other firms that collectively manage in excess of $4 trillion are putting more of their money into the bonds of companies, contributing to a record rally.

Treasuries are “expensive,” according to Roger Bridges, who oversees $15.3 billion as head of fixed income at Tyndall Investment Management Ltd. in Sydney.

Ten-year yields will climb to 1.9 percent by Dec. 31, according to the median estimate of economists in a Bloomberg News survey this month.

Concern about Europe “and uncertainty about the U.S. economy is picking up,” Bridges said. “It’s obviously going to keep Treasuries fairly well-bid.”
–Bloomberg News–

Related Topics: Pacific Investment Management Company (Pimco)