The risk of owning US government debt is as great as any time since the 1950s with yields at the year’s lows and Treasury Secretary Timothy F Geithner locking in borrowing costs by selling longer-term securities.
Yields on Treasuries would only need to rise 0.3 percentage point over one year on average from 1.67 per cent to produce a loss, based on the benchmark Barclays Treasury index, a study by Los Angeles-based First Pacific Advisors shows. The last time bonds were close to this level was in March 2009, when a 0.43 percentage point rise in yields would have left holders of comparable maturity five-year Treasuries with losses.
“You have to go back into the 1950s to find this kind of activity,” said Thomas Atteberry, who manages $3.7 billion in fixed income assets at First Pacific in Los Angeles. “Interest- rate risk is the most acute it’s been in an extremely long time. I have to stay short, five years and in.”
By shifting more of the risk of higher interest rates onto investors as it increases the average maturity of US debt, the Treasury risks damping demand at bond auctions needed to finance the government’s $1.3 trillion budget deficit. The average due date of the $9.1 trillion of marketable debt outstanding rose to 60 months in March from a 24-year low of 49 months in 2008.
“For new money that comes in on Monday, there isn’t much of a cushion,” said James Sarni, senior managing partner at Los Angeles-based Payden & Rygel, which manages $50 billion. “The risk of losing money is, I believe, quite substantial.”
YIELDS FALL
Bonds rallied last week as reports showed manufacturing in May expanded at the slowest pace in 20 months, unemployment rose to 9.1 per cent and consumer confidence fell to a six-month low.
The yield on the benchmark five-year note was little changed at 1.59 percent at 7 am in New York after falling 12 basis points, or 0.12 percentage point, last week. The price of the 1.75 per cent security due in May 2016 rose 18/32 in the five days to June 3, or $5.63 per $1,000 face amount, to 100 23/32, Bloomberg Bond Trader prices show. Ten-year yields dropped 9 basis points to 2.99 percent last week after reaching 2.94 per cent on June 1, the lowest since December 6.
The median estimate of 70 economists and strategist surveyed by Bloomberg News is for the 10-year yield to rise to 3.8 per cent by year-end. Investors in the security would lose 4.63 per cent, Bloomberg data show, because prices of bonds with longer maturities are typically more vulnerable to movements in interest rates since their payments extend over a greater period.
‘SWEET SPOT’
Holders of two-year notes would lose about 1.02 per cent if the yield climbs to the median estimate of 1.33 per cent from 0.42 per cent on June 3. The price of the notes would fall about $13 per $1,000 to 98 27/32 from 100 5/32, exceeding the $5 in annual interest on the security.
Allstate Corp, which manages $80.2 billion in fixed-income assets, and Loews Corp.’s CNA Financial Corp. unit, which oversees $38 billion of bonds, said they are shifting to intermediate maturities given the risk to the principal of longer-term securities.
“What we’re focused on is maintaining yields in the portfolio and optimizing interest-rate risk,” Judy Greffin, Northbrook, Illinois-based Allstate’s chief investment officer, said on a June 1 conference call with analysts.
Medium-term bonds are “basically the sweet spot for us,” James Tisch, chief executive officer of Loews, said June 3 at a conference in New York. “It provides us protection in case interest rates continue to decline, but likewise if interest rates rise it provides us a steady cash flow of both cash and maturing investments so we can then reinvest at the higher rates.”
