The Federal Reserve will refrain from raising interest rates this year and Treasuries are poised to rally, according to Amundi Asset Management, which oversees $1.1 trillion.
U.S. policy makers, who meet Tuesday and Wednesday, will stay on hold as they struggle to spur inflation, said Eric Brard, the global head of fixed income. Treasuries will also benefit because they’re attractive compared to bonds in Japan and Europe, where yields are negative, Brard, who is based in Paris, said in an interview Monday in Singapore. Treasuries rose Tuesday.
“Markets are under pressure of slower economic growth, slow inflation,” he said. “We have a lot of inflows going into the U.S. market. We will see continuing flows in the coming months. This is good for U.S. Treasuries.”
The Amundi Bond U.S. Aggregate fund has returned 6.6 percent in the past 12 months, according to data compiled by Bloomberg. The performance beats 80 percent of its peers, based on the figures.
The U.S. 10-year note yield dropped two basis points, or 0.02 percentage point, to 1.56 percent as of 7 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in May 2026 rose 6/32, or $1.88 per $1,000 face amount, to 100 5/8. The yield will fall “well below” 1.5 percent during the months ahead, Brard said.
Safety Demand
Treasuries advanced Tuesday as investors sought the safety of U.S. government securities before the Fed gathering and a Bank of Japan meeting at the end of the week, said Kazuaki Oh’E, the head of fixed income at CIBC World Markets Japan Inc. in Tokyo. Prices extended gains after Japanese Finance Minister Taro Aso said the government has yet to decide on the size of a fiscal stimulus package planned for the nation.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, was about 1.50 percentage points. The spread has been below the Fed’s inflation goal of 2 percent since October 2014.
Slim Odds
The odds of a Fed rate increase this year are less than 50 percent, yields in the futures market indicate.
The hunt for yield is spreading to U.S. corporate bonds, said Hajime Nagata, a bond investor in Tokyo at Diam Co., which manages $161 billion. Bonds in the Bloomberg U.S. Corporate Bond Index yielded 147 basis points more than Treasuries, the narrowest spread in 13 months.
U.S. government securities have returned 5.1 percent in 2016, based on the Bloomberg World Bond Indexes. Investment-grade company debt has gained 8.6 percent, the indexes show.
For an article outlining the dangers in the corporate bond market, click here.
Molson Coors Brewing Co. and Walt Disney Co. sold bonds at record-low interest rates earlier this month. Investors put in more than $70 billion of orders for Teva Pharmaceuticals Ltd.’s $15 billion sale last week. “It’s very difficult to get new issues,” Nagata said. “So many people are going to corporate bonds right now.”
Treasury yields will probably keep falling, and the S&P 500 Index looks “stretched” after setting a record earlier this month, helping drive the hunt for income in company debt, Nagata said.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Keith Jenkins
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