Older securities -- known as off-the-runs -- are tougher to trade even under normal conditions, and were hit hardest by the evaporation of liquidity in March. A blow-up of basis trades -- which exploit price differences between cash Treasuries and futures -- helped stoke the turmoil. That left some off-the-run prices too depressed relative to benchmarks, according to the Vanguard team.
“The volatility in March was breathtaking,” she said. “While part of my management is taking a very long term view, we had dislocations in the Treasury market space and we took advantage.”
‘Accommodative for Years’
The world’s biggest economy will merely hobble back as states and businesses gradually reopen, requiring years of monetary support, in the estimate of Wright-Casparius and her colleagues at the $5.3 trillion asset manager.
They see the benchmark 10-year Treasury yield bumping around in a range and slowly gliding higher to about 1%, from around 0.7% now. But that level will only be attained by late-2021, when growth finally returns to pre-virus levels and inflation rebounds above the Fed’s 2% target, Wright-Casparius says. Increased government borrowing will help boost long-term yields, said the Queens, New York, native.
The move toward a steeper yield curve -- the gap between 2- and 10-year rates has expanded to about 50 basis points from just above 30 at the start of the year -- will gradually gain momentum, she adds.
“Initially, we see the curve and rates range-bound -- and then toward the recovery phase we are looking for slightly higher yields and slightly steeper curve,” she said.
Vanguard’s downbeat view toward the U.S. growth trajectory is shared by several market veterans and Fed officials. Fed Chairman Jerome Powell says the economy faces unprecedented downside risks that could do lasting damage to households and businesses. The recovery process could stretch through until the end of next year and depend on the delivery of a vaccine, according to Powell.
The central bank has cut rates to near zero and ramped up Treasury purchases to calm markets. It’s also been buying debt in other asset classes, ballooning its balance sheet by more than $2.5 trillion this year.
“The Fed will be accommodative for years,” Wright-Casparius said.
This article was provided by Bloomberg News.