U.S. debt king of sovereigns

February 23, 2015 09:38 AM

Treasuries are at the cheapest levels against their Group of Seven peers in eight years. Janet Yellen may indicate whether that’s justified this week.

U.S. 10-year notes yield 1.1 percentage point more than the average among G-7 bonds, the most since September 2006. Yields are pushing higher after January employment data issued this month showed gains in jobs and wages, boosting speculation the economy is improving enough for the Federal Reserve Chair to raise borrowing costs in 2015.

“There’s a really strong recovery in the U.S.,” said Hiroki Shimazu, senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “The hike in rates will start in the middle of this year. Inflation and the economic situation are very different from what’s happening in Europe and Japan.”

Ten-year yields fell two basis points, or 0.02%age point, to 2.09% as of 8:46 a.m. New York time Monday, based on Bloomberg Bond Trader data. The price of the 2% note maturing in February 2025 rose 6/32, or $1.88 per $1,000 face amount, to 99 6/32.

The yield will rise to 3% by June 30, Shimazu said. At that level, it’d be closing in on the average of 3.28% for the past decade.

Treasury 10-year yields compare with rates of 0.37% on similar-maturity German debt and 0.373% on Japan’s. Even yields on euro-denominated securities from Portugal, which came through an international bailout and a bond-market exile this decade, dropped below the rate the U.S. pays to borrow in dollars for 10 years on Monday.

Fed Rates

Yellen is scheduled to testify in the Senate on Tuesday and in the House of Representatives the following day. She can update the central bank’s view after policy makers signaled at their Jan. 27-28 meeting they’re willing to keep interest rates low for longer given risks to the economy.

Policy makers will raise the Fed’s main rate in about seven months, according to a Morgan Stanley index. They have kept the benchmark, the target for overnight loans between banks, in a range of zero to 0.25% since 2008.

An imminent rate increase “seems a stretch,” said Nicholas Gartside, the London-based chief investment officer for fixed-income at JPMorgan Asset Management Inc., where he helps oversee $1.7 trillion. “We would have thought September, December” for tightening policy, he said in an interview on Bloomberg Television’s “Countdown.”

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