(Bloomberg News) The world's biggest bond dealers dispute Bill Gross's assertion that the $9.13 trillion market for U.S. Treasuries offers little value.
While Gross, who runs Pacific Investment Management Co.'s $236 billion Total Return Fund, is betting against government debt, the 20 firms that trade with the Federal Reserve predict yields on the benchmark 10-year Treasury note will hold below 4% for a third straight year for the balance of 2011.
"I could join the dealers and say the 10-year's not going to go to 4%, so what am I left with?" Gross said in a telephone interview April 20. "I'm left with an under-yielding, less-than-inflation security. I have better choices. As a firm we're not going to put up with it."
So far, Goldman Sachs Group Inc., Credit Suisse Group AG and the rest of the primary dealers are proving right. U.S. bonds of all maturities are generating their best returns since August, gaining 0.49% this month. Optimism Congress will cut spending, slower growth and rising demand from banks meeting tighter risk standards governing the capital they must hold to cushion against losses are supporting bond prices.
Yields on 10-year notes ended last week at 3.39%, down from this year's high of 3.77% on Feb. 9, even as Standard & Poor's cut its outlook for the U.S.'s top AAA credit rating to "negative" from "stable." S&P said the move indicates a one-in-three chance of a downgrade.
"What's telling is the significant volume of buying when 10-year yields were above 3.50% and 30-year bond yields were around 4.65%," said William O'Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer. "There's still significant demand for long-end Treasury paper at those levels and I don't think Bill Gross is going to make that demand disappear."
Demand at Treasury auctions has risen to record levels this year, with investors submitting $3 in orders for every $1 of debt offered, data compiled by Bloomberg show. At this month's auctions of three-, 10- and 30-year bonds, the so-called bid-to- cover ratio exceeded the average of the previous 10 sales.
RBS forecasts yields will fall to 3.25% by June 30, before ending the year at 3.6%. Goldman Sachs, the most accurate bond forecaster in the 13 quarters ended March 31 based on data compiled by Bloomberg, sees them at 3.5% in June and 3.75% in December.
"Increased downgrade risk doesn't necessarily imply increased Treasury yields," Goldman Sachs economists led by Jan Hatzius in New York wrote in an April 19 report. "A significant push toward fiscal austerity would lead to lower growth and lower growth would lead to easier monetary policy for longer."