The longest decline in Treasuries this year has left U.S. government debt the cheapest since March 2011 when measured by real yields and the best relative value compared with German bunds in more than two decades.
After inflation, 10-year U.S. notes yielded 0.91 percent last week, or 1.77 percentage points more than real yields on U.K. gilts, the widest spread in 25 months. Versus Germany, the securities are the least costly in 23 years when adjusted for the recent record-low interest rates around the world that distorted the normal relationship, according to FTN Financial.
Federal Reserve Chairman Ben S. Bernanke is counting on Treasuries to contain borrowing costs as the central bank buys $85 billion a month in securities to sustain the economic recovery that lifted U.S. consumer confidence to the highest in almost six years. The better relative yield for U.S. bonds may help bolster demand even as Warren Buffett said this month that he pitied fixed-income investors because of about record-low interest rates.
“The Treasury market is cheaper than almost any other comparable market on a relative value basis,” Jim Vogel, an interest-rate strategist at FTN, said by phone May 15. “There is the thought out there that Treasuries are expensive when in reality they offer the most value given the improving economy and the relative real yield they offer compared to others.”
The Memphis, Tennessee-based firm has correctly been less bearish on bonds than consensus forecasts for the past two years. In May 2012, the firm’s chief economist, Christopher Low, said 10-year yields would fall to 1.5 percent from a then 1.79 percent. They hit that mark three weeks later, and fell as low as 1.38 percent in July. The rate fell three basis points to 1.92 percent as of 9:38 a.m. in New York.
Treasuries due in at least 10 years were yielding 40 basis points more than non-U.S. sovereign debt on May 16, according to Bank of America Merrill Lynch indexes. As recently as September, U.S. rates were lower than those for the rest of the world.
While yields on 10-year Treasuries rose to 1.95 percent last week, below the average of about 5 percent since 1990, they are 60 basis points, or 0.6 percentage point, higher than similar-maturity German bunds. That’s about double the average since 2003. They are five basis points more than gilts, versus an average of about 30 basis points below over the same period.
“As expensive as Treasuries are, if you compare them to other developed markets it makes it easier to own them,” Raman Srivastava, the head of global fixed income at Boston-based Standish Mellon Asset Management Company LLC, which manages $170 billion, said in a telephone interview on May 15.
In FTN’s analysis, which adjusts for today’s record low interest rates around the world as monetary policies from the U.S., euro zone, the U.K. and Bank of Japan converge to give a more-accurate reading of relative value, Treasuries are about 30 percent cheaper than average, according to Vogel.
Treasury 10-year notes fell in each of the past three weeks, the longest stretch since December. Yields have risen from 1.66 percent on April 26 amid reports showing gains in jobs and consumer confidence. The price of the benchmark 1.75 percent security due May 2023 declined 15/32 last week, or $4.69 per $1,000 face amount, to 98 5/32, Bloomberg Bond Trader data show.
Savers dependent on bond payments are “victims” of central bank policies to lower borrowing costs, Buffett, the chief executive officer of Berkshire Hathaway Inc., said at the company’s annual shareholder’s meeting in Omaha, Nebraska, May 4.
“I feel sorry for people that have clung to fixed-dollar investments,” he said.