Treasuries at 3% Will Tempt $67 Billion Spanish Fund Manager

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(Bloomberg) -- CaixaBank Asset Management says it is preparing to buy Treasuries should the benchmark yield break above 3 percent, having lost interest in many European sovereign bonds.

Spain’s biggest money manager, which oversees the equivalent of $67 billion, wants to add U.S. debt to build a “tactical” position, Chief Investment Officer Guillermo Hermida said in an interview at his Madrid office. The purchases won’t need hedging as long as the euro stays in a range of $1.18-$1.25, he said.

“Treasuries are looking more interesting, and our entry point is 3 percent to 3.25 percent” for 10-year notes, Hermida said. “In Europe -- although you can do well with bonds in different short periods, the yields have gotten so artificially low in Europe that they don’t seem attractive to us.”

Bond markets are pricing in the possibility of even higher interest rates in the world’s biggest economy compared with the euro zone, the largest single market. The Federal Reserve is pledging to keep hiking rates through 2018, while the European Central Bank plans to wind up its quantitative-easing program this year -- both potentially pressuring yields to the upside.

The Treasury 10-year note yield jumped to 2.95 percent in February, the highest level since January 2014. It was at 2.81 percent on Friday in London. Inflation in the U.S., which erodes the buying power of Treasury interest payments, will be about 2.08 percent annually over the next decade, as implied by breakevens.

ECB Purchases

Hermida said he thinks the ECB will pull the plug on its asset-purchase program in September -- not wind it down gradually through December as some strategists predict -- but that still won’t make yields attractive any time soon.

Spanish investors are faced with low yields on their domestic debt. The level on Spain’s 10-year bonds fell to 1.16 percent at the end of March, the lowest since October 2016, when the yield dropped to a record 0.862 percent.

“The euro area’s inflation is close to its 15-year average, and GDP is above-average for that period, so we don’t really know why the ECB remains super-loose,” he said.

His CaixaBank team forecasts the yield on the region’s benchmark bond, the German 10-year bund, almost doubling to 1 percent by year-end. That’s still unattractive to Hermida.

“They should have ended QE already.”

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