Tags: federal reserve | janet yellen | pimco | treasury bonds

Yellen Drives Treasury Volatility With Pimco Saying More to Come

Friday, 19 December 2014 09:01 AM

Janet Yellen is sending the world’s biggest bond market into gyrations and Pacific Investment Management Co. said there are more to come.

U.S. 30-year Treasurys declined for a third day while a gauge of volatility in the market climbed to a 16-month high. Federal Reserve Chair Yellen used a meeting this week to prepare the market for higher interest rates in 2015, after the central bank ended bond purchases earlier this year. The extra yield investors got for holding 10-year Treasurys instead of German bonds rose to the highest in 15 years.

“The Fed confirmed they are very determined to move in the summer time, or may be as early as April,” said Scott Mather, one of the managers for the Pimco Total Return Fund, the world’s biggest bond fund. “The markets are a bit complacent, we think, about this new Fed regime in terms of thinking there is always going to be that Fed put,” he said on Bloomberg Television’s “First Up” with Angie Lau.

Treasurys extended the longest streak since September, sending the 30-year yield up two basis points, or 0.02 percentage point, to 2.84 percent at 7:23 a.m. in New York, according to Bloomberg Bond Trader data. The 3 percent bond due November 2044 slid 1/2, or $5 per $1,000 face amount, to 103 5/32.

The rate on 10-year notes was little changed at 2.22 percent after climbing 15 basis points in the previous two days.

Pimco is seeking high-quality, liquid bonds for its holdings, said Mather, who spoke from Newport Beach, California, where company is based.

Rate Outlook

Pimco’s view differs from that of its co-founder and former chief investment officer Bill Gross who said the Fed may be constrained by disinflationary pressures after oil prices plunged in recent weeks.

The Fed said Dec. 17 it will be “patient” on the timing of the first rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time.”

An index measuring 10-day price volatility in the Treasury market rose to 5.23 on the same day, the highest level since August 2013. It was 5.19 Thursday. The gauge has averaged 3.14 in the past 12 months.

A plunge in the Russian ruble to a record low and a slide in oil prices that sent crude to its biggest loss in 2014 in six years helped drive volatility as investors sought the relative safety of government debt.

“The market has been volatile this week and there is going to be quite a significant increase in short-bond yields if the Fed does as they said they will do,” said Jussi Hiljanen, head of fixed-income research at SEB AB in Stockholm. “We maintain our prediction that the first rate increase will take place in September. Risks are certainly that they will hike less than they project at this point.”

Withdrawing Support

The yield difference between 10-year Treasurys and their German counterparts rose to 1.6035 percentage points today, the most since June 1999 as the European Central Bank is poised to ease policy further.

The Fed is withdrawing monetary support as the U.S. economy recovers from a recession that began in December 2007 and ended in June 2009. Policy makers in October ended the bond purchases they had used to put downward pressure on borrowing costs.

The Bloomberg U.S. Treasury Bond Index returned 5.8 percent in 2014 through yesterday, set for the biggest annual advance since 2011.

The U.S. has the world’s biggest bond market, with $12.5 trillion of government debt. Japan is second with $8.36 trillion and the U.K. ranks third with $2.22 trillion.

“A lot of the volatility was caused by people preparing for what the Fed was going to say,” said John Gorman, head of dollar interest-rate trading for Asia-Pacific at Nomura Holdings Inc. in Tokyo. “If there are any big flows to come through, the market will be a bit whippy given the fact that liquidity is light” as the year ends, he said.

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Janet Yellen is sending the world's biggest bond market into gyrations and Pacific Investment Management Co. said there are more to come.U.S. 30-year Treasurys declined for a third day while a gauge of volatility in the market climbed to a 16-month high. Federal Reserve...
federal reserve, janet yellen, pimco, treasury bonds
Friday, 19 December 2014 09:01 AM
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