Such a quick pivot could prompt a flood of short covering, market watchers say. In fact, given the magnitude of this month’s move, it’s likely that long-time bears such as commodity trading advisers are already headed for the exits, according to Vineer Bhansali, founder of the Newport Beach, California-based asset-management firm LongTail Alpha.
“These types of massive moves can really only be ascribed to positioning changes,” Bhansali said, adding that he’s positioned for the yield curve to steepen. “I can see two-year notes rallying 50 to 100 basis points if this Fed pivot is really going to happen. And if that doesn’t happen relatively soon, then 10-year yields will go back to the 4.5% to 5% range.”
Yields above 5% last month persuaded active bond managers at Pacific Investment Management Co., Doubleline Capital, Capital Group and Columbia Threadneedle, among others, to load up on longer-dated debt. This week’s JPMorgan Chase & Co. client survey revealed that active investors have only kept adding to those bets, with so-called net longs jumping to a record 78% of those surveyed.
Among the bigger winners, Western Asset Management’s core plus bond fund has gained 6% in the past month, topping 98% of peers and pushing the $22 billion fund back into positive territory for the year.
Conceding they had been too early anticipating an end to Fed tightening and lower inflation, portfolio manager Mark Lindbloom noted that “it’s been a very painful adjustment over the last year and a half.”
Western Asset has shifted more of its rate exposure to the two- and five-year sectors from the long-end, while remaining overweight agency mortgages, he said.
“In the last 25 years the Fed has been through five tightening cycles and when they get to that last tightening and arguably we’ve seen that for six months down the road, you see the two-year or five-year rally substantially,” Lindbloom said.
This article was provided by Bloomberg News.