The biggest investors in Asia and Europe are keeping their money in U.S. Treasury securities even after the steepest two-month loss for the securities erased $317 billion of market value.
Mizuho Asset Management Co., which oversees $32 billion, added Treasuries due in 10 years or longer to its holdings in the past month. HSBC Private Bank, with $480 billion in assets, bought U.S. notes when 10-year yields rose to 2.5 percent. Deutsche Asset & Wealth Management, which manages about $1.3 trillion, is holding debt maturing in less than four years, betting American interest rates will remain subdued.
After doubling holdings of Treasuries to $5.6 trillion in the past five years, overseas investors are resisting the market’s 3.2 percent slump in May and June and last month’s record $79.8 billion of withdrawals from bond funds. Since the Federal Reserve signaled it may slow the pace of asset purchases this year, the world’s biggest and most-actively traded debt market now offers the highest yields relative to other developed nations in three years.
“It’s the most liquid market in the world,” Yoshiyuki Suzuki, the head of the fixed-income department in Tokyo at Fukoku Mutual Life Insurance Co., which oversees $57.1 billion in assets, said in a phone interview last week. “The market has been volatile and some investors may not like it, but there is no reason to avoid U.S. Treasuries. The current movement is an overreaction.”
Suzuki said he purchased Treasuries maturing in about 10 years in May, and added to that position in late June.
Benchmark 10-year note yields rose to 2.74 percent last week from this year’s low of 1.61 percent on May 1. The price of the 1.75 percent security due in May 2023 fell 2 2/32, or $20.63 per $1,000 face amount, to 91 1/2 last week.
The yield rose to as high as 2.75 percent on Monday before dropping 10 basis points, or 0.1 percentage point, to 2.64 percent.
Yields have risen 32 basis points since June 19, when Fed Chairman Ben Bernanke said policymakers may begin to reduce $85 billion in monthly bond purchases should the world’s largest economy meet the central bank’s goals. The average yield in the past five years was 2.74 percent.
Treasuries maturing in 10 years and more yielded 85 basis points more than non-U.S. sovereign debt on Friday, according to Bank of America Merrill Lynch indexes. Similar maturity non-U.S. government debt yielded more a year earlier.
Benchmark U.S. 10-year notes yielded 102 basis points more than similar-maturity German bonds on Friday, the most since July 2006. The spread with U.K. gilts rose to 25 basis points on Friday. As recently as January, U.S. Treasuries yielded 23 basis points less than British government bonds.
“Yields are now getting closer to a level that we are comfortable with,” said Willem Sels, the London-based U.K. head of investment strategy at HSBC Private Bank. “Treasury rates may head higher in a longer run, but we don’t envisage a bond bear market scenario. We are not as optimistic as the Fed in terms of growth outlook. Therefore, we think that it’s likely the extreme spike is behind us.”
While the Fed may be preparing to cool quantitative easing asset purchases, other central banks are ready to step up stimulus. European Central Bank President Mario Draghi said last week that there are no plans to end its low-rate policy until economic recovery is assured.
The ECB kept its benchmark interest rate at 0.5 percent. In the U.S., the Fed’s target for overnight loans between banks has remained at zero to 0.25 percent since the end of 2008.
“We interpret this tremendous increase in yield as an overreaction to Bernanke’s statement,” said Yusuke Ito, a money manager at Mizuho Asset Management in Tokyo. The Fed said “it will slow down quantitative easing, not raise interest rates,” Ito said. “The market is expecting an interest-rate hike to come soon. We don’t think that is going to happen. We are positive on Treasuries.”