Unloved Treasury Notes Become New Favorite

Growing demand for shorter-maturity debt shows fixed-income investors remain concerned that Europe’s sovereign debt crisis may worsen, slowing global growth after reports last month on everything from U.S. retail sales to durable goods suggested a rebound. The bids suggest that government borrowing costs may stay at about record lows while the U.S. ramps up borrowing to finance a budget deficit that exceeds $1 trillion. “The situation in Europe has basically closed down what I’m sure many reserve managers thought was going to be their primary venue to diversify away from the U.S. dollar,” Robert Tipp, chief investment strategist in Newark, New Jersey, at Prudential Fixed Income, which oversees $300 billion in bonds, said in a Nov. 2 telephone interview. “Against that backdrop, the U.S. Treasury market is looking better than ever.” “In a world where it is unclear if the euro-zone will be able to hold together, Treasuries have been viewed as a safe haven,” Franco Castagliuolo, co-manager of the $5.4 billion Fidelity Government Income Fund, said in a Nov. 3 interview. Boston-based Fidelity Investmentsmanages $1.4 trillion. 

The central bank said in September it would sell $400 billion of short-term debt and use the proceeds to buy an equal amount of longer-maturity securities. Traders refer to the program as Operation Twist after a similar action in 1961 designed to contain borrowing costs for companies and consumers. “While Operation Twist has been remarkably successful in flattening the curve,” it hasn’t caused a sell-off in the shorter maturities the Fed has been disposing of, said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut, in a Nov. 2 telephone interview. “It’s really just been a bullish event.” “Treasuries are still the deepest and most liquid market and the dollar is still the world’s reserve currency, and those things count,” Michael Brandes, global head of fixed-income strategy for Citi Private Bank, a unit of Citigroup Inc. with $250 billion in global assets under management, said in a Nov.1 interview. “Treasury yields will be capped by prospects for growth and inflation pressures, which we think are pretty tame.”

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