Low Yields
Investors should buy three-, four- and five-year Treasury notes and Treasury Inflation Protected Securities to benefit from the market’s mispricing of when the Fed eventually increases benchmark borrowing rates, Gross said on Bloomberg Television on Oct. 1. The Total Return Fund has gained 2.5 percent in the past month, outperforming 98 percent of comparable funds, according to data compiled by Bloomberg.
Low yields have been driven by the Fed, which bought more than $2.3 trillion of Treasuries and mortgage-related bonds since 2008, lifting its assets to a record $3.73 trillion from less than $1 trillion five years ago. In January it began purchasing $45 billion in Treasuries and $40 billion of mortgages monthly to boost the economic recovery.
The recent drop in 10-year note yields “has much more to do with the Fed than anything else,” Gene Tannuzzo, a money manager in Minneapolis at Columbia Management Investment Advisers, which oversees $340 billion, said in an Oct. 2 telephone interview.
For about six months Tannuzzo had been betting Treasuries would drop, then he started buying in early September. He favors U.S. corporate bonds and emerging market debt.
Yield Curve
The difference between the yields on two- and 10-year Treasuries has narrowed since Fed Chairman Ben S. Bernanke refrained from tapering. The yield curve has shrunk to 230 basis points from a more than two-year high of 255 basis points on Aug. 22, suggesting investors are embracing the Fed’s outlook of lower rates for a longer time.
“The back and forth in Washington matters little with the exception of some of the budget debates and the implication for taxes and potential for temporary default,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview Sept. 30.
CRT recommends investors buy seven- to 10-year Treasuries and sell three- to five-year debt, along with 30-year bonds.
“The market trades off of developments of economic data and the implied impact that has on Fed policy,” Lyngen said.