For much of the last decade, US bond investors lamented the ultra-low yields on government securities. Today, the highest inflation in 40 years pushed ‘income’ back into ‘fixed income’ as yields fell the most on record and yields jumped. What investors need to decide now is whether getting back into the beleaguered asset class is a timely move or an invitation to grab a falling knife.
Even 3% yields can’t attract wary Treasury investors
Caution is in order and for good reason. Traders who thought Treasury yields peaked last month, with two-year notes yielding around 2.78%, are seeing them take another run at those highs, and the 10-year note has cracked again 3% this week. Investors at the reopening of 10-year Treasury bonds on Wednesday – the highest yield since 2018 – offered lukewarm demand. They submitted offers for 2.41 times the amount offered, which was lower than the average of 2.5 times over the past six reopenings. Fixed income funds recorded significant outflows throughout the year. Jim Vogel, an analyst at FHN Financial, wrote that the auction went “with an obvious lack of enthusiasm” that echoed another auction earlier this week.
Markets are still trying to determine how much the Federal Reserve is willing to raise the fed funds rate as it tries to keep inflation from taking root in the US economy, and attention has turned. to the report on the consumer price index which should be published. Friday. Economists polled by Bloomberg forecast consumer prices rose 8.2% in May from the month a year earlier, still near the highest since the 1980s. Inflation may have hit a peak, but the downward slope is far from steep enough to reassure the central bank. the inflationary stick to the service sector of the economy. The cross-currents can be dizzying for investors and economists, who agree that the Fed will raise interest rates through the summer, but are beginning to differ sharply on what they think the central bank will do in the fall, when the economy may have slowed considerably. With inflation as high as it is, bonds yielding between 2.5% and 3% may still seem like meager compensation. These coupon payments will likely buy fewer groceries next year than they do today.
On the other hand, no one expects inflation to stay this high forever, which can make buying and holding long-term bonds attractive. Exchange-traded fund investors began returning to mid- to long-term US government bond funds in early May when it looked like yields had peaked, but they appear to have fallen back recently. as it became less clear that yields had plateaued. .
The debate is not whether inflation will stay above 8% for the foreseeable future, but how fast it will fall and whether the economy is ready for future peaks. Supply chains remain somewhat blocked, but have improved. Energy prices are high, but they never stay high forever.
This does not necessarily mean that short-term bond yields are back below the 0.5% level that prevailed in the decade following the financial crisis. There are also longer-term opposing forces, with prognosticators fearing that the war in Ukraine and the pandemic supply chain experiment are among a confluence of factors that will reverse globalization, prompting developed countries to produce goods. potentially more expensive closer to home. Others predict that the transition to clean energy will entail higher costs, at least initially, as society invests in new products and infrastructure.
Yet interest rates have been on a clear downward path for decades – even centuries, according to economic historians – and history suggests they will settle much lower than they are today. today. For long-term investors, long-term bonds can be a worthwhile investment. It’s mostly a question of whether other investors have the confidence to risk a notch or two.
More other writers at Bloomberg Opinion:
• Beware of a bear market that is more than a bear cub: Nir Kaissar
• Inflation’s ‘fun’ period was far too short: Jared Dillian
• Today’s pensions don’t favor Millennials and Gen Z: Erin Lowry
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.
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