“While we expect inflation to fall, the question is will markets be happy where it settles down to?” said Pollack, the head of fixed income for private wealth management. “That’s why I’m a little reluctant to say let’s buy here.”
US 10-year yields steadied Monday after falling as much as four basis points to 2.88% in Asian trading after China reported industrial output and consumer spending dropped to the worst levels since the pandemic. A look under the hood of the derivatives market suggests hedge funds are unwinding bearish Treasury exposures.
Candriam and AXA Investment Managers are among the firms that see US debt as a better bet than bunds for now. The market-implied expectations suggest the Fed will start cutting rates as soon as 2024, after lifting the funds rate to just over 3% next year.
“We are starting to think about buying Treasuries,” said Nicolas Forest, head of global fixed income at Candriam. “US yields are more fairly priced because the hiking cycle is already taking place. We are definitely lagging in Europe.” The German two-year yield, around 0.15% on Monday, is “too low” given the deposit rate may be 0.25% by year-end, he added.
The ECB is only expected to start raising rates in July and traders don’t see cuts for at least the next four years. On this trajectory, US bond prices would get a meaningful boost through a Fed easing cycle at a time when bunds face the headwind of tighter monetary policy.
That’s also a negative for Italian bonds. BNY IM recently increased a short in Italian bond futures as the ECB phases out the easy-money era, while BNP Paribas SA advised against a long position. Italian bonds led euro-area declines Monday.
Bonds in Europe may yet offer opportunities for Mark Healy, a portfolio manager at AXA Investment Managers. He thinks the UK looks like a relatively safe place to be right now, given the Bank of England’s tightening campaign is in swing.
“We’d favor the UK the most, then the US and then Europe, even though we’d probably push back a bit in terms of how many ECB hikes are priced in,” said Healy. “So further down the road, European government bonds could offer value.”
--With assistance from Edward Bolingbroke and Garfield Reynolds.
This article was provided by Bloomberg News.