The sudden slowdown in US inflation has left Treasuries at the cheapest levels in almost two years, aiding the Federal Reserve's efforts to tamp down long-term borrowing costs while the economy improves.
Yields on 10-year notes, the benchmark measure for everything from home loans to corporate bonds, reached an 11- month high of 2.08 per cent on March 8. The securities pay interest 0.88 per centage point higher than the personal consumption expenditures index deflator, the Fed's favoured inflation gauge, the widest gap since May 2011. Growth in so-called real yields is what Fed Chairman Ben S Bernanke needs to persuade bond investors that he has inflation under control, even after pumping more than $2.5 trillion into the economy to spur growth and bring down the jobless rate. Jeffrey Gundlach, whose $39.5-billion DoubleLine Total Return Bond Fund beat 97 per cent of its peers last year in part by avoiding US government debt, said on March 5 that "relative value has swung more to the favour" of Treasuries.
"The Federal Reserve and Ben Bernanke are not concerned about inflation right now, and neither is the bond market over the short term," Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, said in a telephone interview March 1.
Incomes fall
The PCE gauge, which measures household spending, rose 1.2 per cent in January from a year earlier, the smallest increase since October 2009 and down from a recent high of 2.9 per cent in September 2011, the Commerce Department said March 1. The central bank has said it wants to keep inflation below two per cent.
That may be easier because payroll taxes rose in January, and $85 billion in spending cuts went into effect after Congress was unable to reach a budget agreement last month. Incomes slumped 3.6 per cent, the biggest monthly drop in 20 years, the Commerce Department reported March 1.
Yields on 10-year notes rose 20 basis points, or 0.20 per centage point, to 2.04 per cent last week in New York trading, the biggest increase since the five days ended March 16, 2012, according to Bloomberg Bond Trader prices. The yield touched 2.08 per cent, the highest since April 5, 2012, after falling for the previous two weeks and sinking 11 basis points in February. The 10-year notes yielded 2.04 per cent at 7:07 am in New York.
Gundlach buys
"Relative value has swung more to the favour of Treasuries," Gundlach, whose Los Angeles-based DoubleLine manages about $53 billion, said in a March 5 webcast. After telling investors that Treasuries were overvalued in July, DoubleLine resumed buying government securities when yields rose, he said.
