NEW YORK- Some investors are increasing exposure to longer term US Treasuries in the midst of a historic sell-off, as spiking yields promise to juice returns despite expectations that interest rates will not come down quickly.
Bets that Federal Reserve rate hikes aimed at taming inflation would cause a recession and send Treasuries rallying have ended badly this year, with a resilient US economy bolstering the case for higher rates for longer. As a result, Treasuries are on track for an unprecedented third straight annual loss.
Some of those bets were upended last month when the Fed updated its forecasts, implying another hike this year and projecting high rates will continue through 2024. That pushed long-term yields to 15-year highs as the market finally embraced “no-landing” or “soft-landing” scenarios in which the central bank curbs inflation without causing a recession.
But the latest surge in yields, which rise when bond prices fall, has made long-dated Treasuries more attractive to some investors because they can lock in returns of about 5 percent on 10 or 30-year US government bonds. By comparison, many believe the returns on shorter-dated debt will likely decline over the same period.
Felipe Villarroel, portfolio manager at TwentyFour Asset Management, said he recently swapped some 10-year Treasuries for higher yielding 30-year Treasuries. At these levels, yields give “a massive cushion in your total returns” to protect against bond prices falling further, he said. Total returns on bonds include interest payments and price changes.
In the week ending Oct. 11, Treasuries saw the largest weekly inflows – $7.2 billion – since March 2023, Bank of America Global Research said in a note. Yields on the benchmark 10-year US Treasury were over 4.95 percent in Asia trade on Thursday, their highest level in more than 16 years, and 30-year yields breached 5 percent this month for the first time since 2007.
Matt Smith, investment director at British fund manager Ruffer, has been adding exposure to 30-year Treasuries and 10- and 30-year Treasury inflation-protected securities (TIPS) in recent weeks, roughly doubling the “duration weights” in his portfolio, a measure of a portfolio’s price sensitivity to changes in interest rates.
