NEW YORK: Treasuries are on track for their best performance since 2011 as low inflation, higher yields relative to other sovereign borrowers and persistent global turmoil enhanced the allure of the securities.
United States debt pared gains this year for a second week as the Treasury sold US$104 billion (RM364 billion) of notes and trading volume slowed before the Christmas holiday.
Investors move forward their predictions of when the US Federal Reserve (Fed) will raise interest rates next year amid signs of faster economic growth. Treasuries trading will have a recommended early close on Wednesday and be shut the following day for the New Year’s holiday.
“Treasuries really present an awful lot of value, in light of the fact that the US dollar is improving, which should also help restrain inflation,” said Christopher Sullivan, who oversees US$2.3 billion as chief investment officer at United Nations Federal Credit Union in New York.
“The trajectory of recent economic growth in the US suggests the Fed can begin tightening monetary policy next year.”
The benchmark 10-year note yield has fallen 78 basis points this year, or 0.78 percentage point, to 2.25 per cent in New York, according to Bloomberg Bond Trader prices.
The 2.25 per cent securities maturing in November 2024 finished the week at 99 31/32. The yield increased 17 basis points during the past two weeks.
The two-year yield, which is more sensitive to changes in central bank policy, rose 36 basis points this year to 0.74 per cent, on pace for its biggest increase since 2009.
Treasuries have returned 5.6 per cent this year, set for the best performance since 2011, according to the Bloomberg US Treasury Bond Index. They lost 3.4 per cent last year.
Economists had predicted the 10-year yield would jump to 3.44 per cent as the Fed tapered its purchases of Treasuries and mortgage-backed securities this year, which it had been buying at a pace of US$85 billion per month since the start of 2013.
Economists in a Bloomberg News survey conducted in January had forecast 2.8 per cent growth in the US gross domestic product for this year.
“We entered this year with great anticipation of an economic rebound that, by the end of April and the two months after that, everyone realised wouldn’t be achieved,” said Jim Vogel, head of interest-rate research at FTN Financial in Memphis, Tennessee.
Diminished inflation pressures were highlighted by the plunge in oil prices as US stepped up its extraction from shale while demand lessened as economic activity from Europe to China slowed and as the Organisation of Petroleum Exporting Countries declined to cap production.
The price of the global benchmark Brent crude has fallen 46 per cent this year, the most since 2008.
Inflation expectations for the next five years have declined to 1.19 per cent, down from 2.11 per cent June 24, based on the difference in yields between Treasury Inflation-Protected Securities and US government debt not tied to the consumer price index.
“Global inflation expectations were falling well before oil,” Vogel said. “Oil started as a supply story and then became a demand story and is closing out the year as a supply story.”
Treasuries also benefited from the widening gap for 10-year yields between the US and Germany. The difference between the two securities widened to 1.66 percentage points from 1.10 percentage points at the end of last year. The gap at almost the record 1.69 percentage points reached in June 1999.
Demand was also bolstered by a various geopolitical crises including Russia’s annexation of Crimea region in February and the resulting standoff between it and Ukraine that led to sanctions by the US and European nations against Russia.
A report last week showed the US economy expanded an annualised five per cent in the third quarter, exceeding the highest forecast among 75 economists.
Fed Chair Janet Yellen signalled on December 17 that the central bank is on track to raise interest rates next year as the economy improves. The benchmark rate has been in a range of zero to 0.25 per cent since 2008.
The government sold US$104 billion of securities last week, ending with an auction of US$29 billion of seven-year notes on December 24, before the market closed for the Christmas holiday. Bloomberg