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Greenspan warns bond rally untenable as Bill Gross says go long

Former Federal Reserve Chairman Alan Greenspan answers a question by Ben White of Politico at the 2014 Fiscal Summit organized by the Peter G. Peterson Foundation in Washington, Wednesday, May 14, 2014. Lawmakers and policy experts discussed America's long term debt and economic future.


A day after Bill Gross said central-bank support limits the downside for long-term government debt, former Federal Reserve Chairman Alan Greenspan called the bull market in Treasuries unsustainable.

The yield on the U.S. 10-year note fell to the lowest in two weeks even as Mr. Greenspan warned it may rise in the long run to as much as 5 per cent. On Wednesday, the Fed lowered projections for the path of interest rates, while the Bank of Japan shifted the focus of its stimulus to controlling bond yields. The actions prompted Mr. Gross, manager of the $1.54 billion Janus Global Unconstrained Bond Fund, to say he favors longer-dated sovereign debt.

"Whenever you have a bull market, it looks as though it is never going to turn," Greenspan, the second-longest serving Fed chairman, said in an interview on Bloomberg Television. "This is a classic case of a peak in a speculative security."

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Investors globally have regarded monetary policy with growing skepticism that there's more central banks can do to stoke inflation and economic growth. Asset-purchase programs and negative interest rates have pushed yields on more than $9 trillion of government securities worldwide below zero, according to Bloomberg Barclays index data. The European Central Bank triggered a global selloff this month after signaling it wouldn't pursue further stimulus.

The yield on the U.S. 10-year note fell three basis points, or 0.03 percentage point, to 1.62 percent as of 11:08 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 98 29/32.

The yield will climb to 1.72 per cent by year-end, according to the weighted average in a Bloomberg survey of analysts that places a greater emphasis on most-recent projections.

The Fed on Wednesday held off on raising interest rates, indicating a hike later this year is likely while lowering projections for 2017 and beyond.

The probability of a move this year is about 57 per cent, according to futures data compiled by Bloomberg. That's based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase. Still, the tightening cycle is poised to be the slowest and shallowest in recent history, based on the market for overnight index swaps, which reflect expectations for the fed funds effective rate.

The difference between Treasury two- and 30-year yields fell for a fifth day, declining to about 1.57 percentage points. That gap, a gauge of the yield curve, has flattened over the past year as traders bet the Fed would increase short-term rates, curbing the long-term outlook for inflation and economic growth.

Mr. Gross on Wednesday said he was extending duration by buying longer-term debt amid persistent signs of slow economic growth globally and subdued inflation. Longer maturities have a higher duration, meaning they gain more in price when interest rates decline.

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"The timing of a bond bear market has certainly been delayed," Mr. Gross said in an interview on Bloomberg Television. The BOJ's plan "provides what I call a soft cap on Treasuries and on gilts and on bunds," and signals limited downside in terms of price. "You can't fight central banks."

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