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Washington / Bloomberg
Treasuries are falling behind corporate bonds in a reversal from last year, as the US economy shows signs of improvement and oil prices stabilize following a rout.
Investors are willing to accept as little as 216 basis points of extra yield to buy company debt instead of Treasuries, the smallest spread in more than a year, based on a Bank of America Corp. index of investment-grade and high-yield securities.
Benchmark government yields are within 20 basis points of a record low in the US, and they’re below zero in Germany and Japan, driving investors to seek income outside the sovereign markets. The gain in oil prices can signal improved consumer demand, evidence of economic growth that would hurt Treasuries yet support for company debt.
Economists predict a report will show New York manufacturing expanded for a third month in July. The Treasury will release figures on overseas holdings of the nation’s assets.
“We’re seeing significant opportunity in credit markets,†Mark Kiesel, Pimco’s chief investment officer for global credit, said on Bloomberg Television Aug. 12. “You’re looking at very low yields across the world, and investors will have to look to other assets other than government bonds.†Kiesel has been recommending corporate bonds all year.
The Treasury 10-year note yield was little changed at 1.51 percent as of 10:41 a.m. in London, Bloomberg Bond Trader data show. The price of the 1.5 percent security due in August 2026 was 99 31/32. The yield dropped to a record 1.318 percent last month.
Bond Returns
Benchmark Treasury 10-year yields may be confined to a range between 1.5 percent and 1.6 percent, according to Barra Sheridan, a rates trader at Bank of Montreal in London.
US government debt has returned 5.4 percent in 2016, according to the Bloomberg U.S. Treasury Bond Index, through Aug. 12. A similar gauge of investment-grade corporate debt earned 9.2 percent.
Treasuries climbed about 1 percent last year while corporates fell about 1 percent, the indexes show. Crude oil futures contracts have risen more than 20 percent in 2016, after slumping 30 percent in 2015 and 46 percent in 2014.
“The rally in corporate bonds will continue,†said Hiroki Shimazu, a strategist at MCP Inc. in Tokyo. “In the first half of the year, the oil companies performed the worst because of the fall in oil prices. Recently oil prices have stabilized,” he said.
MCP’s parent, based in Hong Kong, is a hedge fund management and research company with US$6
billion in assets.