Top US managers betting bond market still has room to run

NEW YORK: US bond fund managers are betting that the steep gains in Treasuries over the last month are here to stay, Reuters reported.

Yields on the benchmark 10-year Treasury rate have dropped to near 2.10% after rising as high as 2.55% as recently as May 2 as fears of escalating trade wars and slowing global economic growth have spooked equity markets and sent investors to the safety of bonds. Bonds yields fall as security prices rise, leaving investors with capital appreciation gains.

But instead of seeing the recent rally as just a fear trade, fund managers from firms including BlackRock Inc, Wells Fargo Asset Management and Sierra Investment Management say they are still buying Treasuries in anticipation of additional interest rate cuts this year by the Federal Reserve to try to revive inflation amid a slowing economy.

The near $16-trillion sector produced a total return of 2.35% in May, its strongest monthly showing since August 2011, according to an index compiled by Bloomberg and Barclays. Long-dated Treasuries generated a stellar 6.7% return, their juiciest performance since January 2015.

“We haven’t gotten the inflation engine going and I don’t think we will,” said Margie Patel, a senior portfolio manager at Wells Fargo Asset Management. “It’s a horrible outcome for fixed-income investors who have been spoiled for 30 years and now they’re facing a complete yield drought that will probably get worse,” she said, adding that a fall in the yield of the 10-year Treasury to 1.5% over the next year “would not be out of the question.”

The core consumer price index increased at an annual rate of 1.6% in April, well below the Fed’s target rate of 2%. Fed Chairman Jerome Powell said on Tuesday that the central bank is watching the fallout from the ongoing trade war between the U.S. and China and will react as “appropriate.”

Bob Miller, a portfolio manager and head of U.S. multi-sector fixed income at BlackRock, said he expects the Fed to cut interest rates by 50 basis points by the end of this year because of slowing global economic growth.

“The challenge is that the rest of the world is doing worse than expectations from six months ago, with Europe being particularly soggy over the last year. With the rest of the world proving disappointing and U.S. growth already decelerating, I think you will see the Fed respond,”

he said.