Despite the increasing risks associated with the trade, some major bond managers are maintaining their bullish stance on the market for US government debt.
Brandywine Global Investment Management, Columbia Threadneedle Investments, and Vanguard Group Inc. continue to believe in an upcoming fixed-income rally, even as the economy shows resilience and the Federal Reserve considers raising interest rates.
However, not all market-watchers share the same conviction. JPMorgan Chase & Co. strategists recently abandoned their recommended long position in five-year Treasuries.
The year was expected to be favorable for fixed income, with assumptions that the Fed would pivot to cutting rates and trigger a strong rally to offset the historic losses of 2022. However, a strong job market and persistent inflation dashed those expectations and undermined bets on monetary policy easing.
As a result, most bond managers have experienced only modest recoveries in/2023, primarily relying on income from high yields. The steadfast bulls are patiently waiting for the economy to falter before realizing their anticipated gains.
Jack McIntyre, a portfolio manager at Brandywine, remarks, “There was a lot of talk about the year of the bond, but don’t be surprised if it’s the year of the coupon.” Brandywine’s Global Opportunities Bond Fund continues to favor longer-dated Treasuries and emerging-market debt, positioning itself for richer income streams and potential outperformance during a recession. McIntyre acknowledges that this allocation may not fare well if the economy and inflation regain strength.
While some managers choose to remain cautious, parking their investments in cash with Treasury bills offering yields above 5%, the bond bulls are not ready to give up. They believe in waiting for the full impact of Fed rate hikes and anticipate potential market turbulence, as witnessed in March during the regional banks crisis when Treasuries rallied.
Roger Hallam, global head of rates at Vanguard Asset Management, states, “The bonds-are-back narrative still holds.” Vanguard Group oversees $880 billion in active bond strategies. He emphasizes that cash yields are not sustainable, and changes in the macro environment can erode potential returns.
The pivotal debate in the market revolves around the timing of this change. While fiscal stimulus and strong consumer spending continue to challenge the consensus of an impending economic slowdown due to higher rates, the market still prices in recession-type rate cuts for 2024 and 2025. Evidence of a housing rebound and the economy’s ability to withstand tightening measures would threaten this view.
At Columbia Threadneedle, Gene Tannuzzo remains overweight in the 10- to 30-year area of the Treasury curve, anticipating two more rate hikes from the Fed in/2023 but expecting rate cuts in 2024 due to the lagged effects of tightening.
Ultimately, bond performance will depend on the data and the duration of rates remaining above 5%. The bulls find some solace in the level of income generated by their investments, as time works in their favor this year, thanks to higher bond coupons.
