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Treasury Bulls Score $166 Billion Windfall With Help From Draghi

Thursday, 04 September 2014 12:51 PM

Remember last year’s taper tantrum, when investors fled bonds in the face of less Federal Reserve stimulus?

That now seems like a quaint exercise unlikely to be repeated anytime soon. Even though the U.S. central bank is winding down its debt buying, there’s a new gorilla in the room: the European Central Bank.

President Mario Draghi is pumping more and more cash into the global bond market, taking the lead in a race to lower borrowing costs. The ECB said Thursday it plans to buy securitized debt and covered bonds, and it surprised analysts by dropping all three of its main interest rates by 10 basis points.

“In the last several months, the European bond market has been a very dominant force on U.S. yields,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. As for which type of bond has benefited the most, he said, “the longer the better.”

Treasuries maturing in more than 15 years have returned 16.7 percent so far this year, the most for the period since 2011. That’s equal to about $166 billion worth of gains, Bank of America Merrill Lynch data show.

BlackRock ETF

Draghi’s stimulus is helping keep a lid on borrowing costs in the U.S. even as the growth outlook continues to improve. The nation’s joblessness fell to 6.2 percent in July from 6.7 percent in December, yet yields on the benchmark 10-year Treasury note have also tumbled from 3.03 percent at year-end. The securities yielded 2.45 percent at 10:59 a.m. in New York, up 0.05 percentage point from yesterday.

Instead of girding for rising interest rates as the economy strengthens, investors have been pouring cash into long-dated U.S. debt.

They’ve funneled $3.9 billion into BlackRock Inc.’s iShares 7-10 Year Treasury Bond exchange-traded fund this year, the most among U.S. fixed income ETFs, Bloomberg data show. The fourth- biggest winner has been the iShares 20+ Year Treasury Bond ETF, with $1.7 billion of deposits.

Analysts keep cutting their predictions for how much borrowing costs will rise, too. They now forecast a 2.89 percent yield on the 10-year Treasury note at year-end, down from a July call of 3 percent, according to a Bloomberg survey.

Relative Value

That’s in part because the debt looks pretty attractive relative to the opportunities abroad: The U.S. benchmark 10-year note yielded today the most versus its Group of Seven counterparts since 2007. Last month, when yields on 10-year German debt dropped below 1 percent, Treasuries maturing in more than 15 years gained 4.2 percent, the biggest return for the month since 2011.

While it’s unclear how much lower Draghi can push these bond yields, his efforts to stave off recession in Europe have helped hand U.S. fixed-income investors billions of dollars in unexpected profits.

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Even though the U.S. central bank is winding down its debt buying, there’s a new gorilla in the room: the European Central Bank.
bond, fund, investing, BlackRock
Thursday, 04 September 2014 12:51 PM
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