A ray of light shimmering through another dark day on Wall Street: Treasury yields at decade highs are now tempting big money managers from BlackRock Inc. to Amundi on the conviction that the asset class will deliver the hedging goods in the next downturn.
That tentative shift in the investment landscape may soon offer respite for traders rocked by the historic selloff in the world’s largest bond market this year.
With equities crumbling ahead of Wednesday’s Federal Reserve gathering—where officials are expected to boost rates by 75 basis points for the third time in a row—short-term U.S. yields are trading near 4% for the first time since 2007. At the same time fixed income is dangling the biggest rewards relative to equities in more than a decade.
All that has investors including those at JPMorgan Asset Management turning more constructive on global government debt that’s lost almost a fifth of its value this year, according to Bloomberg data.
“Without a doubt fixed income will be back with a bang,” said Ursula Marchioni, head of BlackRock portfolio consulting EMEA.
So while it won’t solve the problem of near double-digit losses in debt portfolios this year, the thinking goes that bonds are now in a better position to eke out gains in any economic downturn ahead—something that could in turn revive faith in the trillion-dollar 60/40 investing complex.
On Tuesday ahead of Fed day, the S&P 500 index extended declines following its worst week since June 17, while Treasury yields notched fresh multiyear highs and a 20-year bond auction was well received amid juicy yields.
The central bank’s campaign to subdue inflation even at the risk of stoking a recession is in theory renewing the appeal of fixed income as a way to guard against both an economic and stock-market bust.
“Some parts of the fixed income environment are attractive again, and can provide diversification for portfolios at this point, which wasn’t the case a few months ago,” Vincent Juvyns, global market strategist at JPMorgan Asset Management, said in an interview on Bloomberg TV.
At the same time some corners of Wall Street money management are wagering that the much-maligned balanced investing strategies will stage a comeback thanks to higher starting yields.