Three weeks ago, Bill Gross said economic turmoil in China would support long-term Treasuries. While bonds slid in August, a rally on Tuesday, combined with a selloff in China shares, shows it may be too soon to start betting against U.S. government debt.
Gross, who built the Pimco Total Return Fund into the world’s biggest bond fund, said China’s decision to devalue its currency pointed to weak global economic growth, lower inflation worldwide and support for long-term Treasuries. A bond-market gauge that shows the outlook for consumer prices slid to a six- year low in August, only to start rising again as the month drew to a close.
“China would give a pause for thought for the Federal Reserve -- at least until there is more clarity,” said Mohit Kumar, head of interest-rates strategy at the investment banking unit of Credit Agricole SA in London. “Hence September is less likely for a lift off. Government bonds remain supported in the near term. However, we are likely to see periods of large swings in markets.”
The benchmark 10-year note yield declined six basis points, or 0.06 percentage point, to 2.16 percent as of 9:45 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2 percent Treasury due in August 2025 climbed 17/32, or $5.31 per $1,000 face amount, to 98 19/32.
U.S. 10-year yields dropped to 1.90 percent on Aug. 24, about half a percentage point from their record low, as investors sought the haven of government debt as stocks in China and around the world slumped.
Bonds went on to give up their gains for the month as shares stabilized and oil climbed. The result was a 0.6 percent decline in August for U.S. government debt due in 10 years and longer, data compiled by Bloomberg show.
Gross’s Janus Global Unconstrained Bond Fund lost 3.3 percent in August, underperforming its peers, whose average loss was 0.9 percent, according to data compiled by Bloomberg.
The Shanghai Composite Index, which has tumbled almost 40 percent from this year’s high, fell 1.2 percent on Tuesday, and earlier dropped as much as 4.8 percent.
The difference between yields on 10-year notes and those on similar-maturity Treasury Inflation Protected Securities, the gauge of trader expectations for consumer prices, dropped to a six-year low of 1.44 percentage points on Aug. 24.While it climbed to 1.64 percentage points on Tuesday, it’s still less than the Federal Reserve’s 2 percent target.
While bonds may fluctuate, yields will rise over the long term, said Kei Katayama, who invests in Treasuries in Tokyo for Daiwa SB Investments, which oversees $48 billion.
“I’m a believer in the slow but gradual economic recovery,” he said. “Eventually consumer prices will go up.” Ten-year yields may climb to 3 percent by the end of December, he said.
Gross left Pacific Investment Management Co. last year for Janus Capital Management. While he’s no longer running the biggest bond fund, his views are still closely watched by investors.
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