Bond traders are still hesitant to take Warren Buffett’s advice and buy when others are selling.
The worst Treasury market rout in decades has pushed policy sensitive two-year yields to around 4.3%, a 15-year high, from just 0.7% at the end of December.
So it would seem a ripe time for dip buyers to dive in. But with the US Labor Department Thursday expected to report that key inflation gauges are holding near four-decade highs, investors are wary of further surprises that could drive the market to anticipate an even steeper course of rate hikes from the Federal Reserve.
“We are not ready to dip our toes in and take the other side,” following the brutal bond selloff this year, said Kelsey Berro, a fixed-income portfolio manager at JPMorgan Asset Management. “What we need to see is more visibility of the policy path. The front-end of the Treasury curve has scope to move higher.”
Those risks were underscored by Wednesday’s release of the Fed meeting minutes from September, which showed that many policy makers were more concerned about tightening policy too little than too much.
Markets have steadily ratcheted up estimates of where the Fed’s key policy rate will peak as the economy has been resilient in the face of the central bank’s most aggressive hiking in decades.
The risk that rate-hike expectations will continue to rise has driven some investors into Treasury bills due in one year or less, which have less downside risk from interest-rate increases. Bills due in October 2023 are currently yielding over 4.2%.
“The 12-month bill has the same yield as 2-years -- why would you take the duration risk?” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investments.
“Cash also provides you good optionality,” he said. “When things fall apart, you can pick up the pieces.”
This year’s sharp climb in Treasury yields has been led by the two-year note. While the selloff paused in mid-June, when yields started drawing back on speculation that a recession could spur an about face by the central bank, yields has since marched steadily higher as Fed officials adopted a consistently hawkish tone.