Global bond fund managers are going long duration on US Treasuries. Several interviewed by AsianInvestor said they are allocating more to US 10-year Treasury bonds or those of longer duration.
Financial market volatility in equities, oil and currencies has forced a return to risk-off positions and emphasising the importance of liquidity. But fears over the US economy make medium-term exposures to Treasuries unattractive.
“We are going long the long end of the yield curve,” said Thomas Poullaouec, Asia head of strategy and research at State Street Global Advisors. “We are also overweight cash and overweight the US [fixed-income markets versus the rest of the world].”
Liquidity is a concern at a time when sovereign wealth funds and monetary authorities in Asia and the Middle East are selling their holdings of Treasuries to support their own currencies.
“We’re a little worried about sovereign wealth funds selling their holdings of US Treasuries for liquidity purposes,” said Malie Conway, co-chief investment officer at Rogge Global Partners in London. “The US 10-year Treasury still seems to be at fair value.”
Liquidity is of particular concern in the lower-quality areas of fixed income. For example, Western Asset is avoiding high-yield bonds, even if valuations are now attractive due to widespread selling of certain issuers, such as oil-and-gas companies.
“We can’t always hold these securities to maturity because our clients are redeeming,” said Desmond Soon, head of Asia ex-Japan fixed income at Western Asset in Singapore. “The pricing may be attractive, but if you end up having to sell, there may be no bid.”
In this environment, noted Soon, most investors are fleeing to the perceived safety of long-term US Treasuries, which is reflecting in the falling yields on 30-year bonds. (Bond yields fall as their prices rise.) “We are long duration,” he said, with the expectation that the yield curve will flatten.
The US Federal Reserve’s stated intent is to raise short-term interest rates four times in 2016, perhaps by 25 basis points each time, but market players are skeptical it can meet this. The Fed is constrained by several factors: a strong dollar, which hurts US corporate earnings abroad as well as American exporters; market volatility, such as that of Chinese stocks or commodities such as oil; and the fear of tipping a fragile US economy back into recession.
Continued on page 2