Scott Solomon is shorting 10- and 30-year Treasuries on a bet yields will keep rising as they catch up with the Federal Reserve’s rapid interest-rate hikes.
“One thing we typically see in a cycle is that the 10 year and the terminal rate for the Fed typically get pretty close to one another,” said Solomon, an 18-year T. Rowe Price veteran in Baltimore. “And obviously the terminal rate’s going to be at least five and a half, whether or not they hike again in November.”
The Fed and markets may be realizing now that 10-year yields are “not sufficiently restrictive enough to slow inflation,” which means the selloff in Treasuries has scope to deepen, he said.
While Solomon is bearish, there are plenty of others in the market who are looking for Treasuries to rebound.
AllianceBernstein LP and JPMorgan Asset Management both say US government securities are a buy as the central bank nears the end of its tightening cycle. Still, bullish predictions for Treasuries have so far proved misplaced as yields have kept climbing over fears the Fed will keep rates higher for longer.
The benchmark 10-year yield rose to 4.64% Wednesday, the highest since 2007, while that on the 30-year bond touched 4.74%, the most since 2011. The Fed raised its key rate to a range of 5.25% to 5.5% in July, and markets are pricing in further tightening by year-end.
Solomon said he had started to favor bonds around May when “we felt like the recessionary forces were really starting to take hold.”
Instead, Treasuries sold off as inflation proved harder than expected to rein in. The selloff has seen T. Rowe Price’s dynamic global bond fund return a loss of 4.4% this year. The fund has still gained 1.8% over the past five years, beating 91% of its peer group.
Solomon turned bearish again in August, when rising energy and food prices and a resilient jobs market convinced him economic growth was more robust than anticipated. That meant inflation was “going to be more difficult to control,” he said.
This article was provided by Bloomberg News.