NEW YORK, Aug 16 (Reuters) – Bond investors who have been defensive in their portfolios in anticipation of a U.S. recession are likely to see interest rates stay elevated longer than expected, a surprisingly resilient We are adjusting our strategy for the economy.
The so-called soft-landing economic pathway, in which the Fed curbs inflation without shrinking output, has gained more consensus in recent weeks, prompting some investors to take more risks or invest in safe haven assets, etc. are urging them to reduce their bets on safe-haven assets. So that the Ministry of Finance repels.
Felipe Villarroel, a portfolio manager at Twentyfour Asset Management, which specializes in fixed-income assets, said it has shifted some allocations from 10-year Treasuries to 10-year U.S. investment-grade corporate bonds. That would reverse a buildup in 10-year Treasury positions that began a year ago when yields were rising on the back of Fed rate hikes.
“The risk of a hard landing tail is priced in. This doesn’t mean we’re too bullish for the economy, but it does mean the weighted average scenario has improved,” he said.
Those demands are becoming increasingly difficult for investors who expected more economic turmoil. Over the past year, the unemployment rate has remained challengingly low and growth has consistently been above trend.
“It will take longer for interest rates to recover,” said John Majiile, senior portfolio manager and head of Treasuries and TIPS at Vanguard Fixed Income Group. “As a result, we are reducing these positions and expect to lag significantly behind our previous expectations.”
While government bonds typically rise in value, which means yields fall, during an economic downturn, long-term yields have surged in recent weeks, with the benchmark 10-year note hitting an almost 10-month high on Tuesday. Recorded.
In addition to pricing to strengthen the economy’s resilience, bond investors are also embracing the recent shift in yield curve control policies by the Bank of Japan, concerns over U.S. debt sustainability highlighted by Fitch’s downgrade of the U.S. rating, and the Treasury Department’s It also factored in the significant funding requirements announced.
Credit investment firm Oaktree Capital said in a recent memo, “We believe the chances of interest rates rising over the long term, recession or not, far outweigh the chances of a short-term rate cut. there are,” he said.
Oaktree Diversified Income Fund managing director and co-portfolio manager Daniel Poli told Reuters that the firm will invest more in floating-rate bonds, for example, in view of rising long-term interest rates. He said he changed the distribution. However, Oaktree is now becoming more selective in leveraged finance, a sector where borrowers are more susceptible to higher borrowing costs.
Anthony Woodside, head of U.S. fixed income strategy at LGIMA, said long-term concerns about the U.S. fiscal situation have pushed 30-year Treasury yields about 20 basis points higher in recent days.
He said he expects the term premium, or the reward investors seek for holding long-term bonds, to continue to rise.
“While we have been tactically implementing yield curve steepener policies in recent weeks, we have relatively tight risk limits on such trades given the elevated levels of volatility,” said Woodside. are set,” he said.
low conviction
Much of the most aggressive monetary tightening in decades will likely come in the rearview mirror, and many on Wall Street admit they were wrong in their predictions.
“I personally think the biggest culprit is spreading the misconception across the market that interest rates can rise for a long period of time, that there is no chance of a recession, which is good for risk-on.” said Steven Dover, chief market strategist at Franklin Templeton Investment Solutions.
So-called risk assets such as stocks and high-yield corporate bonds, which tend to underperform during economic downturns, have emerged strongly from last year’s downturn, while safer assets such as Treasuries have lagged.
But the growing optimism surrounding a soft landing comes with a few caveats, making it difficult for investors to accept the current macroeconomic outlook with confidence.
If inflation picks up again, interest rates could be higher than the market is priced in. If that happens, the economy will likely slow further. On the other hand, the delay in seeing the full impact of the Fed’s rate hikes could make investors uneasy.
Some people ride out the uncertainty by combining exposure to high-yielding short-term bonds with long-term bonds in case of a recession.
Chip Hugie, managing director of fixed income at Trust Advisory Services, said he recommends a “barbell structure,” in which short-term paper is hedged with long-term bonds “when moving into a more risk-off period.”
For Vanguard’s Magiille’s team, this means smaller trades.
“Portfolio managers have discretion to place positions within certain tolerances, but it won’t be a big deal,” he said. “It’s a result of the fact that there’s no agreement on where we’re going.”
Reporting by Davide Barbuscia.Editing: Richard Chan
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