“This tightening cycle is happening from a very low base, and also in the context of the historically unprecedented size of the Fed’s balance sheet,” said Tony Rodriguez, who oversees $140 billion as co-head of fixed-income at Nuveen Asset Management. “That helps keep longer rates from moving higher than they otherwise would.”
Inflation Bets
Inflation is among the biggest drivers of higher long-term yields. And while a bond market signal of price-growth expectations has soared, topping 2 percent, lately it’s suggested that traders don’t expect the reflationary boost to last too long.
For the first time since the recession, the five-year break-even rate has eclipsed the 10-year this year. The gauge, derived by calculating the difference between yields for nominal and inflation-linked bonds, indicates traders don’t see price growth accelerating very much over the next decade.
“The TIPS curve is the market saying that we know short-term, things are going to be good, but long-term, we have some doubts because things like the debt overhang and demographics give us some pause in expecting 3, 4 or 5 percent inflation,” said Scott DiMaggio, who helps oversee $270 billion as director of global fixed-income at AllianceBernstein in New York. “The market doubts that a fiscal thrust will really lead to sustainable higher potential growth.”
Anchors Abroad
Perhaps the biggest reason DiMaggio doesn’t expect much higher yields is because interest rates remain near record lows in Japan and Europe, where central banks are still buying debt to push down borrowing costs.
The extra yield on 10-year U.S. debt over German securities rose in December to the highest since 1989, boosting Treasuries’ appeal. The advantage over Japan is near the most since 2010.
Stripping Supply
And then there’s strips, arguably the biggest bet on duration an investor can make. The amount created is at an all-time high even though the instruments were crushed as interest rates surged after the election.
Franco Castagliuolo at Fidelity Investments said he has a neutral position on duration, leaving room to maneuver as policies from the Fed and the Trump administration become clearer.
“It’s not necessary to be heavily underweight the long-end of the yield curve right now,” said the portfolio manager, whose company oversees more than $875 billion in fixed-income.
“I’m not forecasting there to be these very powerful, pro-growth, animal-spirit-driven forces,” he said. “I’m not particularly skittish about rates right now.”
This article was provided by Bloomberg News.