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Treasuries World’s Worst Performers, Gundlach Sees Higher Yields

Photographer: Patrick T. Fallon/Bloomberg

Jeffrey Gundlach, Chief Investment Officer and Chief Executive Officer of DoubleLine Capital LP.

Treasuries are the world’s worst-performing bonds this quarter before a government auction of the securities today, and Jeffrey Gundlach is bracing for yields to keep rising.

U.S. 10-year yields reached the highest in a month today before data this week that economists say will show jobless claims fell and retail sales improved, adding to the case for the Federal Reserve to raise interest ratesnext year. The Treasury is scheduled to sell $21 billion of 10-year notes today, the second of three auctions of coupon-bearing debt this week.

“I think we’ve hit the lows in yields for the year,” said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “On the whole, the U.S. economy is fine. The Fed is getting closer and closer. That’s becoming front and center.” Nomura is one of the 22 primary dealers that trade directly with the central bank.

The U.S. 10-year (GACGB10) yield was little changed at 2.51 percent at 6:48 a.m. in London, the highest level since Aug. 5, according to Bloomberg Bond Trader data. The price of the 2.375 percent note due in August 2024 was 98 7/8.

Treasuries have returned 0.4 percent since June 30, the worst result of 26 sovereign bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

Higher Yields

DoubleLine Capital LP’s Gundlach, who manages the $35 billion DoubleLine Total Return Bond Fund, said in a webcast that 10-year Treasury yields may climb to 2.65 percent. The weighted average forecast in a Bloomberg survey of analysts is for yields to rise to 2.89 percent by the end of 2014. They were as low as 2.30 percent in August.

The appeal of U.S. government securities is waning amid signs the economy is improving.

Initial jobless claims fell last week, according to a Bloomberg News survey before tomorrow’s Labor Department report. The Commerce Department will say on Sept. 12 that retail sales increased 0.6 percent last month after stalling in July, according to a separate survey.

Traders see a 79 percent chance the Fed will increase its benchmark rate to at least 0.5 percent by September 2015, federal fund futures data showed yesterday. That compares with a 73 percent probability seen on Aug. 29. Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.

Russia Sanctions

Treasuries halted declines today as demand for haven assets was underpinned before European Union governments meet today to discuss sanctions on Russia. The talks follow the EU’s decision this week to put on hold for at least a “few days” a second package of economic penalties against Russia over its encroachment in Ukraine.

“Geopolitical risks are not over and these look like good levels to buy back Treasuries,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “In case of a flight to quality, Treasuries are still a good buy.”

Investors should consider betting against five-year notes, Nomura’s Gorman said. Because of their shorter maturity, they’re more sensitive to what the Fed does with its target for overnight lending. Ten-year notes offer a higher yield that will attract investors, he said.

Spread Narrows

Demand for longer maturities has narrowed the difference between five- and 10-year yields to 74 basis points. The spread contracted to 69 basis points on Aug. 28, the least since January 2009. A basis point is 0.01 percentage point.

U.S. government securities maturing in three-to-five years have lost 0.2 percent this quarter, the biggest decline among 144 debt indexes compiled by Bloomberg and EFFAS.

The U.S. sold $27 billion of three-year notes yesterday at the highest yield since April 2011. The government will auction $13 billion of 30-year bonds tomorrow.

Treasuries due in a decade were last sold on Aug. 13 at a high yield of 2.439 percent, the lowest at the monthly auctions since June 2013. The bid-to-cover ratio was 2.83, the strongest demandsince June 11.

Japan’s 10-year yield was little changed today at 0.54 percent and Australia’s was also little changed, at 3.56 percent.