Deutsche Bank AG was one of the few firms surveyed by Bloomberg in January to correctly predict the worst rout in the U.S. Treasury market since 2009. Now, Germany’s largest lender says it’s time to buy.
“The economy isn’t growing as strongly as we’d hoped,” Dominic Konstam, the New York-based global head of interest-rate research at Deutsche Bank, said in a telephone interview on Oct. 28, one day before a measure of U.S. consumer confidence plunged by the most in more than two years.
Given up for dead less than six months ago by Bill Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., the three-decade bull market in debt is showing renewed strength as indicators such as retail sales and jobs growth falter. Last week, a Citigroup Inc. index showed that U.S. economic data began to fall short of analysts’ estimates for the first time in three months.
Speculation has switched from how soon the Federal Reserve will pare its unprecedented stimulus to how long it may need to wait with the world’s largest economy weakened by a 16-day government shutdown and policy makers falling short of their goals for employment and inflation. Deutsche Bank, which at the start of the year forecast 10-year Treasury yields would rise to 2.75 percent by Sept. 30, now says they will end the year at 2.25 percent, down from last month’s high of 2.73 percent.
“The idea that we have very strong growth and that they’re trying to have a meaningful reduction in monetary policy accommodation, that hypothesis is looking very damaged,” said Konstam, whose firm is one of the 21 primary dealers of U.S. government securities obligated to bid at Treasury auctions.
Bond Allocation
Konstam isn’t alone. Firms from ING Groep NV to SEI Investments Co. have boosted their holdings of Treasuries since September as growth prospects diminished, while a weekly survey by Stone & McCarthy Research Associates showed the proportion of U.S. government debt held by money managers increased in the week ended Oct. 29 from the lowest since June 2012.
Lower borrowing costs are key for the Obama administration and the Fed as they seek to foster the U.S. recovery after its worst recession in seven decades. The Treasury Department faces a record $1.38 trillion in notes and bonds due next year that it will need to repay or refinance.
Yields on 10-year Treasuries, used to help set interest rates on everything from mortgages to car loans, have decreased 0.37 percentage point since this year’s high on Sept. 5 as the shutdown boosted speculation the Fed will prolong its buying of $45 billion in Treasuries and $40 billion of mortgage-backed bonds each month to support the economy.
The rally in the Treasury market has mirrored those for fixed-income securities worldwide in the past month as bonds of issuers from Morgan Stanley to the Mexican government erased their losses for 2013, driven by speculation the Fed will keep flooding the financial markets with cheap money.