Tags: treasurys | bonds | dump | yields

Investors Not Ready to Dump Bonds Despite Higher Yields

Friday, 10 Aug 2012 03:53 PM

 

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For most of 2012, U.S. Treasury yields have been headed in one direction: down. After the 10-year yield hit a record low 1.38 percent in July, it seemed a move to 1 percent was just around the bend.

Instead, yields have moved up — the benchmark 10-year note hit 1.73 percent this — as markets began betting on more central bank stimulus to boost global growth.

Does this mean investors are finally fed up with lending the U.S. government money at super-low interest rates?

Don't bet on it, seasoned bond investors warn.

"It's difficult to get a sustainable sell-off in bonds when growth and inflation are slowing. That the rest of the world is slowing is a worrisome sign for the U.S.," said Rob Robis, head of fixed income strategy at ING Investment Management in Atlanta. "The bull market in Treasurys is not over."

That bull market has lasted for the better part of 30 years, beginning in the early 1980s when then-Federal Reserve Chairman Paul Volcker stamped out inflation.

For almost as long, investors have been calling an end to the bull run. Within the last few years, a cross-section of star investors and money mangers, including Warren Buffett and Pimco's Bill Gross, have urged people to abandon bonds, saying yields had nowhere to go but up.

That may have made investors a bit sheepish about calling for a steady spike in yields any time soon.

While recent U.S. employment and housing data have shown improvement, economists are still forecasting sluggish growth in the years ahead. The economy grew at a 1.5 percent rate in the second quarter, down from 1.9 percent between January and March.

Many investors even expect the Fed, which says it intends to hold short-term interest rates at zero until at least late 2014, to push that deadline back a year at its meeting in September.

"I hear a lot of sell-side economists talking about a recovery but I'm just not seeing it," said Gregory Whiteley, who helps manage $41 billion at DoubleLine Capital in Los Angeles. "I'm not ready to give up on the long Treasury position by any means."

 

FINDING VALUE

Yields began retreating from record lows after European Central Bank President Mario Draghi said he would do whatever it takes to quell Europe's debt crisis and back the euro. He later detailed plans to buy government bonds and lower borrowing costs for Spain and Italy.

Expectations that the Fed may launch another round of asset purchases as soon as next month have also boosted confidence and driven investors toward riskier but higher-yielding assets such as stocks. The Standard & Poor's 500 Index rose above 1400 this week and was within striking distance of a four-year high.

"People are so convinced that the Fed and ECB will act, and when you have the Dow over 10,000, it makes sense to see some money come out of bonds and move into the stock market," said Michael Cheah, who helps manage $1 billion at SunAmerica Asset Management in Jersey City.

But if yields edge up more in the coming weeks, he said he'll look to buy. "I'm looking for value, and since I just don't see inflation spiking, I'll look to buy bonds."

 

FEWER TOTAL RETURN INVESTORS

Dealers stayed on the sidelines at a sale of $24 billion of new 10-year Treasury debt this week, making it the worst 10-year auction in three years.

The results raised questions about whether investors, fed up with record low bond returns, are ready to take on more risk and park their money elsewhere.

"A lot of people can't stand making 1.5 percent on their money," said David Kelly, chief global strategist at JPMorgan Asset Management.

But for some of the biggest Treasury buyers these days, rate of return is low on the list of priorities, said Thomas Graff, a portfolio manager at Brown Advisors in Baltimore, which oversees $30 billion in assets.

That includes foreign central banks, which own more than a quarter of marketable Treasuries and often buy them as a store of value or to manage their own exchange rates.

"The central banks, the financial institutions that have to hold Treasurys for capital purposes, I'm not sure they care whether the yield's 1.50 percent or 1.70 percent or 1 percent," Graff said. "The total return investor has been mostly pushed out of the Treasury market."

If the U.S. economy continues to struggle, Graff said that will keep alive a safe-haven bid among retail investors.

"My sense is we're still facing economic malaise," he said. "So I sure don't want to be the guy holding cash, anticipating buying 10-years at 1.90 percent. We're much more likely to see 1.40 before 2 percent."

© 2014 Thomson/Reuters. All rights reserved.

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