“Until such time as it’s pretty clear that the Fed is actually going to raise interest rates, an additional sell-off” will likely be capped, Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, said in an Aug. 19 telephone interview. The firm is one of the 21 primary dealers of U.S. government securities that trade with the Fed.
Speculation that the Fed will taper its $85 billion of monthly bond purchases led to the rout in bond markets, with Treasuries losing 3.6 percent this year.
The decline is the worst since the 3.72 percent loss in all of 2009 and more than the 3.35 percent drop in 1994 after the Fed doubled its benchmark rate to 6 percent, according to the Bank of America Merrill Lynch U.S. Treasury index. The firm’s Global Broad Market Index has fallen 1.62 percent this year, the largest decline in data going back to 1997.
U.S.-registered bond mutual and exchange-traded funds lost $30.3 billion to investor redemptions this month through Aug. 19, the third-highest on record, according to a report last week by TrimTabs Investment Research in Sausalito, Calif. The withdrawals followed $69.1 billion of redemptions in June and $42 billion in October 2008.
Yield ‘Pressure’
“We are seeing retail bail out of bond funds,” Andrew Richman, the West Palm Beach, Fla-based director of fixed- income at SunTrust Bank’s private wealth management division, which oversees about $101 billion, said in an Aug. 21 telephone interview. “The Fed is going to slow down their bond purchases. Foreign investors are also slowing down their bond purchases. And banks are actually dumping some Treasuries and making more loans. All of that is really putting pressure on yields.”
Tame Inflation
As the curve has widened, consumer prices have remained tame and growth sluggish.
The personal consumption expenditures deflator, the Fed’s preferred measure of inflation, rose 1.3 percent in June, and has been below the central bank’s 2 percent target since May 2012. The five-year, five-year forward break-even rate, which projects the pace of consumer price increases starting in 2018, ended last week at 2.71 percent, below its average over the past decade of 2.75 percent.
The economy grew at a 1.7 percent annualized pace from April through June up from 1.1 percent for the first three months of 2013, Commerce Department data show. U.S. gross domestic product has grown an average of 3.3 percent a year since the end of World War II. It will expand 1.6 percent this year and 2.7 percent in 2014, according to the median estimate of about 70 economists in a Bloomberg survey.
The yield curve widening “has nothing to do with the economy, it just has to do with tapering and the idea that the biggest buyer in the market is going to ease back its purchases,” Richard Gilhooly, an interest-rate strategist at TD Securities Inc. in New York, said in an Aug. 21 telephone interview. “The market has already priced for its termination.”