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Money Managers Starting to Eye Treasury Bonds Again With Yields Spiking

·4 min read

(Bloomberg) -- A ray of light shimmering through another dark day on Wall Street: Treasury yields at decade highs are now tempting big money managers from BlackRock Inc. to Amundi on the conviction that the asset class will deliver the hedging goods in the next downturn.

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That tentative shift in the investment landscape may soon offer respite for traders rocked by the historic selloff in the world’s largest bond market this year.

With equities crumbling ahead of Wednesday’s Federal Reserve gathering -- where officials are expected to boost rates by 75 basis points for the third time in a row -- short-term US yields are trading near 4% for the first time since 2007. At the same time fixed income is dangling the biggest rewards relative to equities in more than a decade.

All that has investors including those at JPMorgan Asset Management turning more constructive on global government debt that’s lost almost a fifth of its value this year, according to Bloomberg data.

“Without a doubt fixed income will be back with a bang,” said Ursula Marchioni, head of BlackRock portfolio consulting EMEA.

So while it won’t solve the problem of near double-digit losses in debt portfolios this year, the thinking goes that bonds are now in a better position to eke out gains in any economic downturn ahead -- something that could in turn revive faith in the trillion-dollar 60/40 investing complex.

On Tuesday ahead of Fed day, the S&P 500 index extended declines following its worst week since June 17, while Treasury yields notched fresh multiyear highs and a 20-year bond auction was well received amid juicy yields.

The central bank’s campaign to subdue inflation even at the risk of stoking a recession is in theory renewing the appeal of fixed income as a way to guard against both an economic and stock-market bust.

“Some parts of the fixed income environment are attractive again, and can provide diversification for portfolios at this point, which wasn’t the case a few months ago,” Vincent Juvyns, global market strategist at JPMorgan Asset Management, said in an interview on Bloomberg TV.

At the same time some corners of Wall Street money management are wagering that the much-maligned balanced investing strategies will stage a comeback thanks to higher starting yields.

“The 60/40 portfolio is definitely not dead, in fact, after the repricing that we’ve seen this year across fixed income markets, we would argue that it’s very much alive,” said Erin Browne, portfolio manager for multi-asset strategies at Pimco. “We now see real value in several segments of the fixed income market, including investment grade bonds, mortgages and securitized products.”

Read more: Bear Market Leaves Bond Investors With Few Places to Hide

The 60/40 strategy is on course for the first quarterly gains this year as stocks recoup some of their losses from June lows, according to a Bloomberg index. More broadly as the Fed makes headway in its inflation battle, the hope is that bonds will have more capacity to hedge stock meltdowns, says Vincent Mortier, chief investment officer at Amundi, Europe’s largest fund manager.

“It was the perfect storm in terms of returns but negative correlations are coming back into the marketplace, which means bonds will become diversifiers again,” he said. “It’s time to look at bonds again.”

During most years when the 60/40 portfolio delivered negative returns of more than 1%, the successive three to five years produced double-digit annualized gains, according to Wells Fargo Investing Institute. For example, after the classic portfolio was down 21.6% in 2008, it returned an average of 11.9% in the following four years through 2011.

Given these investing lessons from history, bond bears are getting less pessimistic.

Paul O’Connor, the head of Janus Henderson’s multi asset team for the UK, for example, has been closing out an underweight position on fixed income to hedge a deeper equity drawdown.

“If you look at yields it’s beginning to look very interesting from a total returns perspective,” O’Connor said. “After a repricing of short-term rate and inflation expectations, it’s becoming plausible that bonds will regain a useful role in a multi-asset portfolio.”

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