(Bloomberg) — Treasuries are falling behind corporate bonds in a reversal from last year, as the U.S. economy shows signs of improvement and oil prices stabilize following a rout.
Investors are willing to accept as little as 216 basis points of extra yield to buy company debt instead of Treasuries, the smallest spread in more than a year, based on a Bank of America index of investment-grade and high-yield securities.
Benchmark government yields are within about 22 basis points of a record low in the U.S., and they're below zero in Germany and Japan, driving investors to seek income outside the sovereign markets. The gain in oil prices can signal improved consumer demand, evidence of economic growth that would hurt Treasuries yet support for company debt.
"We're seeing significant opportunity in credit markets," Mark Kiesel, Pimco's chief investment officer for global credit, said. "You're looking at very low yields across the world, and investors will have to look to other assets other than government bonds." Kiesel has been recommending corporate bonds all year.
The Treasury 10-year note yield rose three basis points, or 0.03 percentage point, to 1.54% as of 10:17 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5% security due in August 2026 was 99 20/32. The yield dropped to a record 1.318% last month.
Treasuries declined even as a report Monday showed a contraction in New York manufacturing. The Treasury will release figures on overseas holdings of the nation's assets.
Benchmark Treasury 10-year yields may be confined to a range between 1.5% and 1.6%, according to Barra Sheridan, a rates trader at Bank of Montreal in London.
U.S. government debt has returned 5.4% in 2016, according to the Bloomberg U.S. Treasury Bond Index, through Aug. 12. A similar gauge of investment-grade corporate debt earned 9.2%.
Treasuries climbed about 1% last year while corporates fell about 1%, the indexes show. Crude oil futures contracts have risen more than 20% in 2016, after slumping 30% in 2015 and 46% in 2014.
"The rally in corporate bonds will continue," said Hiroki Shimazu, a strategist at MCP in Tokyo. "In the first half of the year, the oil companies performed the worst because of the fall in oil prices. Recently oil prices have stabilized," he said. MCP's parent, based in Hong Kong, is a hedge fund management and research company with $6 billion in assets.