19 November 2017

Treasurys’ Swoon Doesn’t Rattle Debt Investors

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Although U.S. Treasury prices are on track for their first quarterly decline since 2013 and many debt investors are in the red for the year, money managers remain mostly upbeat on Treasurys. Their optimism is supported by reduced economic expectations around the financial world at a time of uneven growth, expansive-central bank policy and near-record stock and bond prices in many countries. Many remain cautious in calling for higher bond yields after last year’s unexpected slowdown in global growth whipsawed investors who had been betting a long-awaited bond-market selloff was imminent.

The yield on the 10-year Treasury note has risen to 2.402% in recent trading on Thursday, near the highest level since September, from 1.93% at the end of March. The yield’s increase so far this quarter is the biggest since the bond market was rattled in 2013 by the “taper tantrum” over Federal Reserve plans to pare monetary stimulus. Yet few money managers are expecting a repeat of that episode, in which yields surged above 3% from below 2% in the space of months. Many investors see higher yields as a sign the bond market is adjusting to a modestly improving economic outlook in the U.S. and the eurozone following Europe’s deflation scare this past winter. German government-bond yields have climbed after nearly hitting zero in April.

At the same time, few see signs of incipient inflation in the U.S., Europe or Japan, and the global growth outlook remains unsettled, likely bolstering demand for safe-haven debt. The International Monetary Fund warned in a report this April that the global economy faces a bleak, low-growth outlook through 2020 due to the changes in demographics and other trends.

Mr. Ellenberger said he has anticipated a rise in Treasury yields earlier this year by holding less than a benchmark index allocates. The rise in yields has attracted him to buy Treasury bonds in recent weeks. To be sure, many analysts are closely watching for signs of instability in the market following a series of events over the past year that raised questions about the health of the markets for the world’s most liquid debt: U.S. Treasury yields plunged on Oct. 15 despite a lack of major news. German bund yields briefly spiked earlier this year under similar circumstances.

Investors pulled $6.6 billion net cash out of U.S.-based taxable bond funds and exchange-traded funds this month through June 17, according to data from Lipper. Over the same period, stocks funds and ETFs attracted nearly $16 billion in new cash. U.S. Treasury securities overall have posted a negative return of 1.84% this quarter through Wednesday, according to data from Barclays PLC. So far this year, the return is minus 0.23%, following a 5.05% return during the course of 2014. Returns include price gains and interest payments.

The risk of large redemptions from bond funds would increase if the selloff extends into the third quarter and if investors grow more anxious about the Fed’s shift into higher interest rates, said Tom Girard, head of fixed income for NYL Investors, which manages more than $200 billion in assets. Investors withdrew $875 million net cash out of bond funds and exchange-traded funds targeting U.S. Treasury bonds this month through June 17, according to Lipper. Those funds still have a net inflow of $6.613 billion for the year.

Some investors are worried more about riskier bonds that are far less liquid than U.S. government bonds. Many investors have piled into corporate bonds, including those sold by lower-rated companies, known as junk bonds, in a bid to juice returns in a low-yield world.

Click here to access the full article on The Wall Street Journal. 

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