Yields on U.S. treasuries spikeYields on U.S. treasuries climbed to the highest level in three years on Thursday relative to those of Group of Seven nations before a U.S. government report economists predicted would show unemployment fell in July.
Ten-year Treasuries yielded 37 basis points more than bonds in an index of their G-7 peers, data from Bloomberg shows. The difference was the most since May 2010. Yields surged Thursday on speculation the U.S. economy is growing fast enough for the Federal Reserve to begin trimming its bond purchases, known as quantitative easing or QE, as soon as its next meeting in September.
“The economic fundamentals have been good,” said Allen Lei, a Treasury trader in Taipei at Hontai Life Insurance, which oversees the equivalent of $6.1 billion. “I don’t care whether the Fed tapers QE in September, December or March next year. I just know quantitative easing will end.” Ten-year yields will be 2.75 percent or more by year-end, and Hontai is betting against Treasuries, Lei said.
Ten-year yields were little changed at 2.71 percent as of 12:17 p.m. in Tokyo, Bloomberg Bond Trader data show. The 1.75 percent security due May 2023 traded at 91 26/32.
Yields advanced 13 basis points, or 0.13 percentage point, yesterday. While they have climbed from the record low of 1.38 percent set last year, they are less than the average of 3.55 percent over the past decade.
Japan’s 10-year government bond yield rose as much as three basis points to 0.825 percent. It was the highest level in two weeks.
Treasuries have declined 3.1 percent this year, while Japan’s bonds gained 0.7 percent, based on the Bloomberg World Bond Indexes. Stocks in the MSCI All-Country World Index returned 13 percent including reinvested dividends.
Ten-year yields in will be at 2.64 percent in the U.S. and to 0.93 percent in Japan by year end, according to Bloomberg surveys of financial companies, with the most recent projections given the heaviest weightings. The U.S. has $11.5 trillion of debt, and Japan’s obligations total $9.7 trillion, making them world’s biggest borrowers.
The Fed is buying $85 billion of bonds a month to put downward pressure on interest rates, and policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.
Meanwhile, Korea corporate bond sales plunged to the lowest level in more than seven years in July as borrowing costs rose for a third month.
Won-denominated debt issuance totaled 912 billion won ($111 million) last month, down from 1.25 trillion won in June and the least since 705 billion won in June 2006, according to data compiled by Bloomberg. Lotte Aluminum was the only company to sell debentures this week, borrowing 50 billion won via 3.38 percent notes that mature in 2016, the data show.
Benchmark yields for AA-rated companies rose five basis points last month to 3.36 percent after climbing 46 basis points in June and May, the biggest two-month jump since January 2011, Korea Financial Investment Association data shows.
A successful bond sale by LG Electronics last week did go some way to soothing investor concern that battered market sentiment will lead to a prolonged issuance slump, according to Korea Investment and Securities, this year’s third-biggest arranger of transactions.
“Investors were largely silent in the past months due to increased market uncertainty and expectations that yields will rise further,” said Kim Ki-myung, a credit analyst at the Seoul-based firm. “But the big success of LG’s bond sale proved to the market that demand could be poised to jump any time soon.”
LG, which plans to add its new flagship G2 handset this month to bolster smartphone shipments that rose to a record in the second quarter, raised 400 billion won in a three-part sale on July 25, the month’s biggest deal.
Robust investor demand allowed LG to increase its offering from 200 billion won, the company said in an e-mailed statement on July 31. Some 100 billion won of the proceeds will be used for refinancing while the remainder will be spent on material purchases and service payments, according to the company.
With signs the domestic economy is recovering, debt market conditions should improve and more companies may be encouraged to sell notes from September, said Lee Jong-myung, an analyst at Hanwha Investment and Securities.
“Hopes for an economic recovery are slowly rising and government bond yields are expected to show a gradual increase,” Lee said.
By Wes Goodman AND Anchalee Worrachate