(Bloomberg) - After the inexorable surge of Treasury yields this year, investors are weighing how much of the damage from anticipating Federal Reserve rate hikes has already been done.
Even if Treasuries are in a “mini bond bear-market” -- as suggested by Charles Schwab’s Kathy Jones -- there’s a sense among some that it may not last much longer. The firm’s chief fixed-income strategist advises investors to add a bit of duration because the market has gone a long way already and financial conditions are starting to tighten a little bit.
“It’s very unusual to get drawdowns in excess of 2% or 3% in the bond market,” Jones told Bloomberg Television’s Surveillance Tuesday. “When you’re down 5%, it probably qualifies as a bond bear market.”
A Bloomberg gauge of Treasuries has fallen about 7% from a 2020 peak, pummeled by expectations of a faster-than-expected withdrawal of Fed stimulus. The benchmark 10-year yield has climbed to just under 2% -- its highest in more than two years -- and some commentators have even called for a move toward 3% as the Fed tightens policy to fight red-hot inflation.
Value Trade
But shorter-dated Treasuries already offer value, even though central banks will raise rates over the course of this year, according to Jamieson Coote Pty in Singapore. The bond fund manager sees 10-year Treasuries as a buy should yields climb past 2.2%.
“If you buy now at current levels and yields continue to rise to fully price in the Fed or the RBA hiking rates, the bonds that we hold at the front end will not lose money,” said Duangjai Samranvedhya, the firm’s deputy chief investment officer. Ten-year Treasuries offer value at 2% if you expect the Fed to hike once a quarter, or at 2.2% if it does so at every meeting, she added.
Investors are awaiting data Thursday expected to show stubbornly high U.S. inflation. While that could inject further volatility into markets, Jones expects price pressures to moderate later in 2022 and doesn’t expect the “mini” bear market to last too long.
“We’re not in the camp that says this is regime change and we’re going into a 10-year bond bear market or even perhaps a one-year bond bear market,” she said. “We’re on the verge of probably hitting an interim peak.”
By John McCorry, Tom Keene and Garfield Reynolds
