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.
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