Long-dated US Treasury debt prices slipped in light volume on Friday as talk that Spain might soon request a bailout was said to favour riskier assets over safe-haven US debt. Mid-range maturities outperformed as investors moved out of short-term Treasuries in search of higher yields but avoided 30-year Treasuries in case of a long-term inflation risk.
In Europe, sources with knowledge of the matter told Reuters that Spain was considering freezing pensions and speeding up a planned rise in the retirement age as it tries to meet conditions of an expected bailout package. A Spanish request for a bailout would set in motion the European Central Bank's new bond-buying program and potentially ease worries about the euro zone debt crisis, arguably lessening demand for safe-haven Treasuries.
Reports Spain was getting ready to ask for ECB aid as early as September 27 "sparked a little bit of a risk-on mood," said William O'Donnell, managing director and head of US Treasury strategy at RBS. "A little bit of risk-favourable news in thin volume and boom, Treasuries are lower," he said, referring to long-dated Treasuries. The 30-year Treasury bond, which rallied during the first four days of this week after selling off last week, traded 6/32 lower in price to yield 2.95 percent, up slightly from 2.94 percent late Thursday.
Despite Friday's weakness, the 30-year bond posted its biggest weekly dip in yield since early June. After a four-day rally, "it's predictable you'd see a little profit-taking by people who were lucky enough to buy at the lows," O'Donnell said. Benchmark 10-year Treasury notes traded 2/32 higher in price with their yield little changed from late Thursday at 1.76 percent.
The "belly" of the yield curve outperformed, with five- and seven-year notes posting narrow gains. "Since the Fed came out with its bold actions, extending the zero percent interest-rate policy until mid-2015 and focusing on buying mortgages, value lies at the five-year part of the curve," said Wilmer Stith, portfolio manager at Wilmington Broad Market Bond Fund at Wilmington Trust Investment Advisors in Baltimore.
First, the Fed's zero percent interest-rate policy anchors yields on maturities of three years or less to just barely above zero. To get a higher return, investors are compelled to buy longer-dated maturities. But investors also worry that a yield of less than 3 percent on a 30-year bond leaves them vulnerable to losing value if inflation expectations pick up.
That leaves maturities in the middle of the curve, five- and seven-year notes, the best option, Stith said. The Fed's new phase of quantitative easing also involves buying in this "bucket" of maturities, he said. "The Fed is buying 30-year mortgages, but the duration of those bonds is really like a three- to five-year," he said.
"All things being equal, investors will want to buy a Treasury more comparable to the duration of those mortgages and that's the five- to seven years," said Stith. "So that area of the curve should perform better over the longer term." Stith favours five-year investment-grade corporate bonds. Fed officials this week expressed support for the latest stimulus efforts.
Comments
Comments are closed.