Displaying items by tag: Treasuries

Even though inflation continues to force the Fed’s hand on tightening, money managers are starting to rebuild their exposures toward Treasuries, with the hope that the highest payouts in years will help cushion portfolios from the damage inflicted by additional rate hikes. For instance, Morgan Stanley believes that a multi-asset income fund can find some of the best opportunities in decades in dollar-denominated securities such as inflation-linked debt and high-grade corporate obligations. That’s because interest payments on 10-year Treasuries have hit 4.125%, the highest since the financial crisis. In addition, PIMCO estimates that long-dated securities, which have been hit hard due to the Fed’s hawkishness, will bounce back if a recession should occur. They believe that a recession would ignite the bond-safety trade, where government debt would act as a hedge in the much-maligned 60/40 portfolio. Essentially, higher income and lower duration are helping to make the case that bonds will have a much better 2022. While inflation and liquidity concerns remain, the median in a recent Bloomberg survey shows “dealers, strategists and economists project bond prices will rise modestly in tandem with cooling inflation, with the 10-year US note trading at 3.5% by end of next year.”

Finsum:A combination of higher income payments and lower duration has money managers becoming more bullish on treasuries.

Much has been written about the failure of the 60/40 portfolio this year. What was once the classic allocation has seen its share of losses in 2022. Fueled by drawdowns in both the equity and fixed-income markets, advisors and investors are now thinking twice about the following a 60% allocation in stocks and a 40% allocation in bonds. However, there could be a fix. According to fixed income specialist David Norris, the 60/40 portfolio split should be flipped and focused on short-term bonds. Norris, head of U.S. Credit at TwentyFour Asset Management, told Financial Advisor Magazine that “the bond side of that reversal should be anchored in short-duration bonds.” Norris said that “the rate cycle we are in now, with a lot of volatility and inflation, has created a fixed income market with rates we have not seen for a decade. Yields for short-duration bonds are very attractive now.” Norris is not wrong; U.S. short-term government bonds are paying more than 4.5% right now. A focus on short-term bonds should help investors better navigate the current volatility in the market.

Finsum:A bond strategist at TwentyFour Asset Management believes that the 60/40 portfolio should be flipped and focused on short-term bonds.

While income investors are certainly enjoying higher yields this year, the past decade had not been as kind. The low to flat interest rates over the past ten years may have helped propel the economy and markets since the financial crisis, but they also made it quite difficult for investors to find income. So, Wall Street firms got creative and created complex investment products that offered higher yields. But with rates rising this year, those same products are putting firms at risk, which is why they're jostling to hedge those positions by investing in derivatives that benefit from higher volatility in the market. However, those derivatives are making volatility in the US government bond market even worse. Treasuries were already experiencing massive swings as investors bought derivatives to lessen their bond risk, while dealers made long-volatility bets to hedge their own exposure. This combination led to a huge jump in the MOVE Index, which measures the implied volatility of Treasuries via options pricing. In October, the index breached 160, which is near the highest level since the financial crisis. With additional money betting on the ups and downs of bond yields, this is only going to add more fuel to the fire.

Finsum:As firms increase in their purchases of volatility-linked derivatives to hedge risk, the treasury market is expected to become even more volatile.

Investors were offloading ultra-short-term bond ETFs in a hurry ahead of the Fed’s most recent rate hike. The Federal Reserve’s announced its fourth-straight 75 basis-point interest-rate hike on Wednesday. Ultra-short-term bond ETFs, which are considered cash-like, saw some of the largest inflows this year as the Fed raised rates. However, it appears that investors have now had a change of heart. The iShares Short Treasury Bond ETF (SHV), which tracks U.S. Treasury bonds with maturities of one year or less, saw $2.5 billion in outflows on Tuesday in the fund’s largest one-day outflow on record, according to Bloomberg data. SHV wasn’t alone as a host of other ultra-short-duration funds also saw massive withdrawals earlier in the week. The record outflows suggest that traders believe rising Treasury yields may have topped out and they no longer need the safety that short-term bond ETFs provide. They are either open to more risk with longer duration bonds or are preparing for a potential recession.

Finsum:Ultra short-term bond ETFs are seeing massive outflows as traders extend into longer-duration bonds ahead of a potential recession.

With yields rising as the Fed pursues its hawkish monetary policy, investors are piling billions into ETFs that track both the short- and long-term treasury market. For example, $13 billion has been added to the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) this year, a product that now offers some of the most attractive yields in over a decade, while having very little interest-rate risk. On the other end of the yield curve, investors have flooded a similar amount into the iShares 20+ Year Treasury Bond ETF (TLT), which has experienced historic losses due to the Fed’s rate hikes. TLT has seen more new inflows than any other fixed-income ETF this year. However, the reasons for these inflows likely differ between the two. Investors seeking yield can now find that in a short-term treasury ETF like BIL, while investors that believe the Fed will slow down rate hikes, or even cut rates in the future, will benefit from the high duration that a long-term bond ETF such as TLT could provide. The steep losses in the market this year have also driven defensive investors into cash-like instruments such as BIL.

Finsum:Investors looking for yield and safety are piling into short treasury ETFs, while investors seeking high duration are flooding into long-term bond ETFs.