Treasurys show inflation expectations are falling in 2014 by the most in three years as Bill Gross warned investors to brace for a decline in prices.
Gross, in his second investment outlook since joining Janus Capital Group Inc., said deflation is a “growing possibility” as governments worldwide struggle to stimulate their economies. Economists predict the Labor Department’s monthly employment report in three days will show earnings have yet to recover from the global financial crisis. West Texas Intermediate crude oil dropped to a three-year low as Saudi Arabia cut prices amid speculation that stockpiles increased.
“Inflation will be subdued worldwide,” said Hajime Nagata, a money manager in Tokyo at Diam Co., which oversees the equivalent of $124 billion. “I prefer 30-year bonds.” Nagata said he’s also favoring long-term debt throughout the world’s biggest bond markets.
U.S. 30-year yields, among the most sensitive to the outlook for inflation, declined two basis points, or 0.02 percentage point, to 3.04 percent at 6:25 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.125 percent bond due in August 2044 rose 15/32, or $4.69 per $1,000 face amount, to 101 21/32.
Inflation Expectations
The difference between yields on 30-year debt and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, was 2.08 percentage points. The spread has shrunk 28 basis points in 2014, the most since 2011, and declined to 1.99 percentage points last month, the least in three years.
Benchmark 10-year yields dropped two basis point to 2.32 percent. West Texas Intermediate crude slid 2.1 percent to $76.70 a barrel in New York and reached $75.84, the least since October 2011.
Average hourly earnings rose 2.1 percent in October from the year before, based on the Bloomberg News surveys, unable to bounce back following the recession that began in December 2007 and ended in June 2009. The figure has averaged 2 percent during the past four years, after being as high as 3.6 percent in 2008.
U.S. employers added 234,000 workers last month, down from 248,000 in September, according to the responses from economists.
Bond Returns
Treasury 30-year bonds have returned 21 percent in 2014 through yesterday, compared with 0.8 percent for two-year notes, Bank of America Merrill Lynch indexes show.
The personal consumption expenditures price index has been below 2 percent for more than two years, resisting policy makers’ attempt to maintain a minimum level of inflation. The threat of falling prices can cause businesses to be reluctant to spend or invest.
Gross wrote that central banks around the world have made “a damn fine attempt” at fueling inflation, yet their efforts have pushed up financial assets, rather than prices in the real economy, in his outlook on the Janus website yesterday.
Bob Doll, chief equity strategist at Nuveen Asset Management LLC in Chicago, said the combination of deflation fears and low bond yields have reinforced a sense that the global economy is troubled.
“We remain convinced that U.S. growth remains solid and that risks of deflation creeping into the United States are extremely low,” he wrote on the company’s website. Equities should produce better returns than other assets, Doll said.
Demand for long-maturity debt can be seen in the shrinking difference between U.S. five- and 30-year yields. The spread was 143 basis points after contracting to 139 basis points on Sept. 29, the narrowest since January 2009.