“We are not completely out of the woods with inflation -- so therefore there’s a chance you could possibly see slightly higher yields from here,” said Yvette Klevan, a portfolio manager in the global fixed-income team at Lazard Asset Management who has been working in the investment field since 1982. Yet, she added: “I’d argue that at roughly 3% on the 10-year Treasury, a lot is already baked in.”
At BlackRock, the world’s largest asset manager, funds have “added a little more interest-rate exposure in recent weeks,” said Rick Rieder, the chief investment officer of global fixed income. “People are fearful of much higher rates and we have taken the other side of that.”
Such buying when rate-hike fears are cresting has been lucrative in the past. In 1994, when the Fed’s hikes pushed its benchmark from 3% to 6% in just 12 months, bonds tumbled as traders priced in that the aggressive moves would continue. But growth slowed enough that the central bank started cutting rates in 1995, driving Treasuries to an 18% gain that year.
“It’s in our DNA to look for value in a gloomy bond market, and after a dismal ‘94 bonds did well the following year,” said Mark Lindbloom, a portfolio manager at Western Asset Management. “We know from past cycles that the Fed tightens too far, and we think we’re near the point where higher interest rates slow consumer and business demand.”
Western had been burned from buying bonds earlier this year. Still, it seized on the most recent spike in yields to add to its holdings of both short and long-dated Treasuries.
“We’re a bit beaten up and bloody,” Lindbloom said. “But my history as an active manager says that usually means there is opportunity.”
This article was provided by Bloomberg News.