“The overall carry that you capture from U.S. bonds has really disappeared,” said Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group.
Demand Gap
One looming risk: Even domestic buyers may not be able to keep up with the swelling issuance. That’s one reason JPMorgan Chase & Co. sees 10-year yields creeping up to 1% by year-end, from 0.65% now. But it sees demand from money funds, banks, insurance companies and the Fed mostly keeping yields in check, especially given policy rates near zero and tame inflation.
See here for more on the evolution of the 60-40 investment formula.
“Even though there is a little bit of demand gap, when you look at drivers of rates over a longer period of time -- it’s the market’s outlook for the Fed and inflation expectations that matter a lot more,” said Jay Barry, a strategist at JPMorgan.
The question in the second half of 2020 is how much the Fed might need to step up again, with the virus raging in some states, a new U.S. fiscal package possibly in the works and strategists expecting the Treasury to shift more issuance to coupons.
What it boils down to is that unless the trend of stagnant foreign demand reverses, domestic buyers, including pensions and insurers, will be pivotal to handling the increased supply.
Last month’s 10-year note auction was a case in point: International buyers accounted for less than 10% of demand, while domestic investment funds took almost half.
“I like the long end of the Treasury market,” said Mark Spindel, chief investment officer at Potomac River Capital in Washington. “The reason why the Treasury is issuing so much debt is because the economic troubles are comprehensive. And simple ‘Bonds 101’ -- that’s bullish.”
--With assistance from Tom Lagerman.
This article was provided by Bloomberg News.