[ad_1]
Convinced that a US recession was looming, some of the world’s most prominent money managers bought government bonds this year in a bold bet that they would offset losses suffered in 2022.
That strategy is now failing once again, skewering them with underperformance and testing their resolve as the sell-off deepens week after week.
Last week was especially painful. The annual yield on US government bonds fell into the red as Treasury yields flirted with a 15-year high, reflecting the view that interest rates may rise in the coming years, and the economy can sustain it.
Bob Michele, one of the most outspoken proponents of bonds, is not intimidated. The CIO of fixed income at JP Morgan Asset Management, who correctly predicted Treasury yields falling “to zero” from 2% in 2019, says his strategy now is to buy every dip in bond prices.
The firm’s flagship Global Bond Opportunities Fund is down 1.5% over the past month and has outperformed just 35% of its peers so far this year, compared with 83% in recent years. five, according to data compiled by Bloomberg.
Others in the same camp, including Allianz Global Investors, Abrdn Investments, Columbia Threadneedle Investments and DoubleLine Capital, believe the economy is just beginning to absorb the impact of five percentage points from the Federal Reserve’s rate hikes. A deeply inverted yield curve, a surefire harbinger of recession, supports this view.
“We don’t think this time will be any different,” Michele said. “But from that first rate hike to the recession it could take a while. We continue to see a growing list of indicators that are only at these levels if the US economy is already in recession or is about to enter a recession.”
They can also hedge by making temporary adjustments to duration, even if it goes against their long-term views.
Despite being a bond bull, Columbia Threadneedle’s Gene Tannuzzo has cut duration since July as the yield curve inverted more deeply, shifting to shorter-dated Treasuries. The Strategic Revenue Fund that he helps manage is up 2.8% this year, outpacing 82% of competitors, according to data compiled by Bloomberg.
“The best days for bonds are ahead” as the Fed nears the end of its rate-hike campaign, Tannuzzo said.
By contrast, fund managers at Abrdn and Allianz have overweight positions in duration. DoubleLine has also recently increased long-term bond allocations, but offset them with short-term corporate debt.
“We don’t think we’re going to go wrong,” said Mike Riddell, a portfolio manager at Allianz who has been long duration since mid-2022. “We’ve stayed long duration. We do not believe that all the monetary tightening will have no impact on growth.”
Historical patterns suggest that rate hikes drive economies down more often than not. Former Fed Vice Chairman Alan Blinder studied 11 monetary policy tightenings between 1965 and 2022 and found that four ended in soft landings with stable or lower inflation, and the rest in hard landings.
But whether the returns will follow the economies this time is another question. A key shift in the borrowing needs of the US and other rich economies means they are prepared to allow deficits to rise to finance aging populations, defense spending and fulfill promises to reduce carbon emissions.
Faced with a flood of debt issuance, investors will demand higher returns.
Still, riding short Treasuries in 2023 wasn’t always a ticket to easy gains.
The public mutual fund Virtus AlphaSimplex (ticker ASFYX) is down 6% this year. While its short bond option and long stocks appeared well positioned to benefit from the current environment, a large chunk of the drawdowns came during the banking crisis in the first quarter, according to Kathryn Kaminski, chief research strategist and portfolio manager at Alpha Simplex Group. Her view is that rates will remain high, which justifies the short position.
“If inflation stays where we are now and rates are where we are, then there’s no way that long-term cash flow, with no risk premium, can stay there,” Kaminski said. “If rates don’t come down fast enough, long-term fixed income has to lose value. That’s what the market is underestimating.”
For her part, JPMorgan’s Michele is confident that bond yields will fall once the Fed finishes its tightening cycle, well before the first rate cut.
“Whether the US economy goes into recession or a soft landing, the bond market bounces back after the last rate hike,” he said. “The Fed can keep rates at these levels for quite some time, but growth and inflationary pressure continue to slow.”
— With assistance from Greg Ritchie and Isabelle Lee
#Waiting #elusive #recession #costly #bond #bulls #double