Slowly but surely, bond haters are vanishing across Wall Street -- even as fresh market havoc remains a distinct possibility next year if still-raging inflation forces the Federal Reserve to ramp up policy tightening anew.
Undeterred, money managers are starting to rebuild their exposures across the battered $24 trillion world of Treasuries, on the conviction that the highest payouts in over a decade will help cushion portfolios from the damage wrought by further interest-rate hikes.
Morgan Stanley projects that a multi-asset income fund can now find some of the best investing opportunities in nearly two decades in dollar-denominated securities, including inflation-linked debt and high-grade corporate obligations. The interest payments on regular 10-year Treasuries, for example, has hit 4.125%, the highest since the global financial crisis.
Meanwhile Pacific Investment Management Co. reckons long-dated securities, the biggest losers in this era of Federal Reserve hawkishness, will bounce back as a recession ignites the bond-safety trade, with government debt acting as a reliable hedge in the 60/40 portfolio complex once more.
“People are excited, believe it or not,” said Maribel Larios, founder and CEO of Fiduciary Experts, a Murrieta, California-based registered investment advisor. “It’s all relative, as they’ve seen these fixed-income accounts pay little to nothing in the past. So, 4% -- or even about 2% to 3% in some cash accounts -- is relatively good now.”
Institutional managers who sell government debt to the investing masses are naturally predisposed to talk up the asset class, as is true of those peddling stocks and every other security. And many funds were blindsided this year by failing to anticipate how persistent inflation would become, which hammered the bond market with the steepest losses in decades as the Fed started raising rates aggressively.
But now thanks to beefy income streams and lower duration -- a measure of interest-rate risk -- it’s getting easier to make the case that bonds will prove their muster next year.
In Minneapolis, Minnesota, Bryce Doty, senior portfolio manager at Sit Investment Associates, is telling clients they can enjoy positive bond returns over the next 12 months. Doty is expecting Treasuries to eke out between 4% and 7%, a kind of bullish posture he hasn’t held for the past 18 months or so.
“Coupons are much higher and the two-year Treasury is providing 4.5% and we haven’t seen that in years,” he said.
It’s far from smooth sailing for Treasury managers, with liquidity conditions remaining troublesome, the inflation menace still at large and long-dated securities by no means cheap. On Monday, for example, yields jumped after a gauge of service-sector activity accelerated in November, confirming the economic strength seen in the jobs report Friday that showed faster-than-expected wage and payroll growth.