JPMorgan Chase & Co. and Western Asset Management are among those saying this month’s jump in bond yields represents a buying opportunity, given central banks are getting close to the end of their rate-hike cycles.
“Looking ahead six to 12 months, we think the stage is set for global bonds to outperform,” Robert Abad, product specialist at Western Asset Management, wrote in a note. “The most opportune time to invest in a country’s fixed-income market is when its interest-rate cycle is stabilizing or poised to decline.”
Some investors are piling into Treasuries and other major bond markets even as resilient economic data spur central banks to signal a willingness to add to rate hikes and then maintain higher borrowing costs for an extended period. Bloomberg’s global benchmark for government debt fell this month to deliver a year-to-date loss as longer-dated yields from the US to Australia approached multi-year highs.
A boost in Treasuries issuance, along with Fitch Ratings’ decision on Aug. 1 to lower its credit rating on the US on concerns over swelling government deficits, helped derail investor hopes that the worst was behind bonds this year. Nuveen Asset Management said in a note dated Monday that monetary policy is more important for bonds and that the extra supply of Treasuries is likely to meet sufficient demand.
“We don’t think the US will struggle to find buyers for Treasury securities,” said Saira Malik, chief investment officer of Nuveen. “Treasuries still represent the world’s largest, most liquid core fixed income market.”
Peak Rates
Jupiter Asset Management said in late July that yields on 10-year Treasuries may fall as much as 150 basis points before the end of next year with the Federal Reserve likely to cut rates to bolster a slowing US economy. JPMorgan analysts said in a note on Monday they were sticking with buy recommendations on five-year Treasuries, and for 10-year notes to outperform longer-dated debt.
“With nominal yields close to nine-month highs, valuations modestly cheap, and given some moderation in long duration positioning we stay tactically long five-year USTs,” JPMorgan strategists wrote. They added that they also expect 10-year notes to outperform 30-year bonds, causing that part of the Treasury curve to steepen.
Benchmark 10-year Treasury yields rose as much as three basis points to 4.22% on Tuesday, the highest level this year. Five-year yields advanced two basis points to 4.38%.
Massive Inflows
Treasuries are on course for a record year of inflows as investors pumped $127 billion into funds that invest in the securities to chase some of the highest yields in months, Bank of America Corp. said last week, citing data from EPFR Global. That puts the funds on pace for an annualized record of $206 billion, BofA said. Asset managers also boosted their overall long positions in Treasury futures to a fresh record in the week to Aug. 8, according to Commodity Futures Trading Commission data.
Hedge funds have been busy taking the other side of that bet, setting a record combined short position in the week to Aug. 1 before paring back those bets modestly in the following week.
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