Treasury yields traded above 1.64% on Wednesday, the highest in more than a year, with some forecasting that it could climb toward 2%. U.S. 10-year breakevens -- a gauge of the bond market’s inflation expectations -- traded above 2.30%, the highest level since 2014.
“As the dust settles in the wake of today’s FOMC, we will be focusing upon whether any additional back-up in yields is accompanied by a further widening of breakevens,” said Richard McGuire, the head of rates strategy at Rabobank. “If so then this argues that the move higher in rates is sustainable.”
But as long as U.S. yields don’t rise in a chaotic fashion, risk assets including emerging-market and high-yield corporate debt are expected to outperform, according to BlackRock’s Seth. “Rates can drift higher and still remain a positive backdrop for the risk assets, as long as the vulnerability is under control,” he said.
A Bloomberg Barclays index on global credit returns has gained 11% over the past year, compared with a loss of 2% for a gauge tracking Treasuries. BlackRock switched to a neutral duration position in February from underweight. The fund likes notes sold by Chinese real estate companies and the nation’s onshore bonds.
“The lack of correlation with the rest of the global developed markets also provides a diversification benefit,” Seth said of Chinese debt.
This article was provided by Bloomberg News.