Investors riding easy-money policies are breeding a trillion-dollar monster in the bond market, the likes of which has never been seen in decades of history.
Wall Street will tell you it’s low risk for now -- one that’s been hyped-up for years. But on the current trajectory, just a modest bump in yields near record lows could inflict a world of pain for traders all over the globe.
Dovish monetary bets, relentless demand for safe assets and conviction in the lowflation era are spurring money managers to gorge on long-maturity bonds, or duration risk.
One measure of the relative compensation investors receive to hold longer-dated obligations is a whisker away from a 58-year low. Over in Europe, they’re taking a century of risk for yields barely above 1% in order to escape a $13 trillion global stockpile of negative debt.
All that is leaving duration, a measure of sensitivity to interest-rate changes, near all-time highs across sovereign debt markets. As hopes rise of a U.S.-China breakthrough on trade, bond bulls could suddenly find themselves on the backfoot.
For Thomas Graff, it may be too late to board this bull train.
“Buying duration isn’t a great trade anymore,” said the head of fixed-income at Brown Advisory. The firm has been curbing exposures to longer-dated risk since big bets are already priced into markets, including U.S. rate cuts. “Even if we are heading toward a place of lower rates -- or even if the current range is a kind of normal -- it’s not going to be a one-way train.”
While “speculative” long-duration wagers are a risky proposition, using fixed income makes sense for funds hedging risk assets, Graff said.
As Austria bags more than five billion euros ($5.7 billion) for a new century bond Wednesday, the likes of Pimco, Amundi and Lombard Odier Investment Managers don’t see longer-term premiums awakening from their slumber anytime soon.
JPMorgan Chase & Co. estimates U.S. mutual funds with active mandates have recently increased long-duration exposures after turning underweight last month.