Revised U.S. Bond Market Strategy Amid Economic Resilience
U.S. bond investors are adjusting their strategies in light of an unexpectedly resilient economy that looks set to keep interest rates higher for longer. Previously, defensive portfolio positioning was in anticipation of a recession, but the strength of the economy is prompting change.
Resilient Economy Influences Investor Behavior
A consensus has emerged around a “soft-landing” economic path. This scenario, in which the Federal Reserve manages to curb inflation without causing output to shrink, is prompting some investors to take on more risk or reduce bets that safe-haven assets such as Treasuries will rally.
Felipe Villarroel, a portfolio manager at TwentyFour Asset Management, is shifting some allocations from 10-year Treasuries to 10-year U.S. investment-grade corporate bonds. This move reverses a trend that began a year ago when yields were rising due to the Fed’s interest rate hikes.
Persistently low unemployment and consistently above-trend growth over the past year have made it increasingly difficult for investors to hold onto expectations of economic strife. As John Madziyire, senior portfolio manager and head of U.S. Treasuries and TIPS at Vanguard Fixed Income Group, indicates, the rally in rates will likely take longer than previously expected.
Strategy Changes Amid Macroeconomic Uncertainty
While the tail risk of a hard landing is being priced out, the outlook comes with several caveats due to macroeconomic uncertainty. A re-acceleration in inflation could lead to higher rates than the market has priced in, increasing the chances of a sharper economic slowdown. The lag in the full impact of the Fed’s rate hikes can also be unnerving for investors.
As a result, some are navigating the uncertainty by combining exposure to higher-yielding short-term bonds with long-term bonds in case of a downturn. Chip Hughey, managing director of Fixed Income at Truist Advisory Services, recommends a “barbell structure” which hedges short-term paper with long-term bonds “should we move into a more risk-off period.”
However, even with the adjustments, these remain cautious moves. As Madziyire points out, the trades are smaller, reflecting a lack of consensus about where the market is heading. Therefore, while investors are revising their recession bets and some are taking more risks by shifting their Treasuries allocations, these new trades are being undertaken with a healthy degree of caution due to the overarching macroeconomic uncertainties.
Original Story at www.reuters.com – 2023-08-16 14:40:27
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