The worst Treasury rout in decades has room to run as the Federal Reserve unreservedly makes fighting inflation its top priority, according to JPMorgan Asset Management. 

While yields in the world’s biggest bond market have skyrocketed this year along with U.S. interest rates, they’ve yet to reach their peak and fully price in the risks of an economic downturn, said Iain Stealey, international chief investment officer for fixed income at the $2.5 trillion fund giant in London. He said 4.5% on 10-year Treasurys was a “good” entry level to buy.

“You’d want to be owning Treasurys when there’s sort of more conviction that recession is actually on the cards,” Stealey said in an interview in Singapore. When the Fed finally pauses on hiking rates, “that’s probably when you want to be buying” in a big way.

Stealey’s views come after a gauge of Treasurys sank nearly 15% this year, set for its worst annual loss since the 1970s as the Fed raises borrowing costs to combat sky-high inflation. Yields on 10-year bonds have soared to as high as 4.34% as investors dumped the inflation-sensitive securities and traded around 4.04% on Wednesday.

While the steep selloff has emboldened the likes of Jupiter Asset Management and Pacific Investment Management Co. to turn bullish on bonds, Stealey is waiting for key inflation measures to provide clear evidence that price growth is truly under control before potentially betting big. 

“You need at least two to three months in a row of month-over-month inflation prints, which when annualized, start to become reasonable for them to say ‘We’ve got inflation under control’,” he said. “If the Fed’s going to get to 5.5% or 6% on the terminal rate, the 10-year yield can get to 5%–the whole yield curve’s going to move up with it.”

Stealey sees next year as a much better prospect for fixed income investors.

“I actually think 2023 will be a year that’s very good for bonds because you’re starting with yields quite attractive,” he said. “I think we will be talking about a Fed pause at some point in 2023, which will cause bonds to do very well.”

Here are some edited comments from the interview:

Entry Level
At about 4.5% for 10-year yields, that’s a good entry level. Today’s probably not a bad time to effectively make the first move. The firm’s Global Bond Opportunities Fund is still short U.S. duration, though not as short as it was at the beginning of the year.

U.K. Recession
The U.K.’s got a bigger inflation problem than the U.S., but I would expect the Bank of England will probably get rates high and then is likely to pivot quicker than the Fed. On gilts, they’ve had their volatility, they’ve had their excitement. I think they’re now kind of back to where they probably should be and they’re going to behave with the rest of the world.

Credit Bets
We like short-dated credit and securitized assets with high-quality cash flows. For high yield there is more of a question mark. While spreads in the U.S. market are not pricing in a recession, the all-in yield is close to 10%. That’s attractive.

Yen Weakness
The yen should definitely be weakening. You’ve got a huge interest rate differential now between the Bank of Japan and everyone else. The yen should grind weaker until the day they rip the band-aid off yield-curve control, then it would be a very painful move if you were short yen. 

This article was provided by Bloomberg News.