Convinced that a U.S. recession is imminent, some of the world’s most prominent fund managers have piled into government bonds this year, making bold bets to recoup steep losses in 2022.
That strategy has now failed again, leaving them in a sub-par situation return As the sell-off deepened week after week, their resolve was tested.
This past week has been particularly painful. Annual returns on U.S. government bonds have plunged into the red as U.S. Treasury yields approached 15-year highs, reflecting the view that interest rates may be headed lower. elevated Over the next few years – the economy will be able to sustain itself.
Bob Michele is one of the most talked about outspoken Bond bulls are undeterred.JPMorgan Asset Management’s fixed-income CIO correctly predicted the slide in Treasury yields “All the way down to zero” Starting at 2% in 2019, his strategy now is to buy whenever bond prices dip, he said.
The firm’s flagship Global Bond Opportunities Fund, which has lost 1.5% over the past month, has outperformed just 35% of its peers so far this year, compared with 83% over the past five years, according to data compiled by Bloomberg.
Others in the same camp — among them Allianz Global Investors, Abrdn Investments, Columbia Threadneedle Investments and DoubleLine Capital — think the economy is just starting to absorb the Fed’s five-point rate hike . A deeply inverted yield curve is a sure sign of a recession, supporting the view.
“We don’t think this time is different,” Michelle said. “But it may take a while from the first rate hike to a recession. We continue to see more and more indicators that only reach these levels when the U.S. economy is already in recession or is about to do so.”
They can also hedge by temporarily adjusting duration, even if it goes against their long-term view.
Despite being a bond bull, Columbia Threadneedle’s Gene Tannuzzo has cut durations since July as the yield curve became more heavily inverted in favor of shorter-dated Treasuries. The Strategic Income Fund he helps manage is up 2.8 percent this year, beating 82 percent of competitors, according to data compiled by Bloomberg.
Tannuzzo said “bonds’ best days are ahead” as the Fed draws to a close.
Fund managers at Abrdn and Allianz, by contrast, added to longer-term positions. DoubleLine has also recently increased its allocation to long-dated bonds, but offset It has to do with short-term corporate debt.
“We don’t think we can be wrong,” said Mike Riddell, portfolio manager at Allianz, who has held long-dated bonds since mid-2022. “We’ve been at it for a long time. We don’t think all the monetary tightening won’t have any impact on growth.”
Historical patterns show that rate hikes tend to lead to recessions. Former Fed Vice Chairman Alan Blinder studied 11 monetary policy tightenings between 1965 and 2022 and found that four of them ended in soft landings with stable or lower inflation, while the rest were hard landings.
But this time, whether yields will follow the downturn is another question. A major shift in borrowing needs in the U.S. and other rich economies means they are poised to inflate deficits to fund an aging population, defense spending and meeting pledges to cut carbon emissions.
Faced with a large amount of bond issuance, investors will demand higher yields.
Even so, going into 2023, short Treasuries positions are not always easy to profit from.
Virtus AlphaSimplex Public Mutual Fund (ticker symbol asfix) is down about 6% this year. Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group, said that while its short-term bond and long-term stock call options look well-positioned to benefit from the current environment, a large portion of the money is coming back. The withdrawal came during the banking crisis in the first quarter. Her view is that interest rates will remain high, so short positions are justified.
“If inflation stays where it is, if interest rates stay where they are, there’s no way long-term cash flows (without the risk premium) will stay at that level,” Kaminsky said. “If rates don’t fall fast enough, long-term fixed income will The value goes down. That’s what the market is undervaluing.”
JPMorgan’s Michel believes bond yields will fall once the Fed ends its tightening cycle before it cuts rates for the first time.
“Whether the U.S. economy enters a recession or a soft landing, the bond market will bounce back after the last rate hike,” he said. “The Fed is likely to keep rates at this level for quite some time, but growth and inflationary pressures continue to moderate.”
— With assistance from Greg Rich and Isabel Lee
Svlook
