U.S. 10-year Treasury yields will move in a 3 percent to 3.5 percent range for the rest of the year as the Federal Reserve continues raising interest rates, said Robert Mead, co-head of Asia-Pacific at Pacific Investment Management Co.
“We do think this hiking cycle is quite well advanced,” Sydney-based Mead said at the Bloomberg Invest summit in Sydney. “We also know that the backdrop of the U.S. economy has been pretty strong and going for a long time. At some point we will find these high yields will become an impediment for growth.”
The yield on 10-year Treasuries has topped 3 percent and reached the highest since 2011 on Tuesday as concerns about inflation and the pace of Fed rate hikes increased. While there has been a growing consensus for higher rates this year, debate has shifted to the extent of the advance with JPMorgan Chase & Co.’s Jamie Dimon and Franklin Templeton suggesting yields are headed toward 4 percent.
The bonds yielded 3.06 percent on Wednesday. Markets are pricing in two more hikes this year.
Mead said the higher yields represent an opportunity for investors, especially over a longer time horizon. The negative correlation between bonds and stocks offered diversification and volatility-adjusted returns, he said.
Reduce Underweight
“Nothing is pound-the-table cheap,” but rising yields mean investors can gradually reduce their underweight bond positions, Mead said.
Mark Delaney, the chief investment officer of AustralianSuper Pty, the nation’s largest superannuation fund, said he was thinking about buying bonds again after selling almost all holdings last year.
“We sold almost all our bonds in 2017, but now they’re a percent higher -- a percent plus, a bit higher -- we’re starting to think about whether or not we should start closing those short positions,” Delaney said at the summit.
Jeffrey Johnson, head of Asia-Pacific fixed income at Vanguard Investments Australia, said inflation was still seen as anchored. Powerful forces such as demographics, globalization and technology should keep a cap on yields, Johnson told the summit.
Fair value for U.S. 10-year yields would be 3 percent to 3.25 percent, Johnson said. Vanguard has seen evidence of investors getting back into fixed income to take advantage of the higher yields, he added.