Bond bears smell blood, others claw to buy

Some of the biggest US investors believe the bond market has slipped into a bear phase. Others believe it has turned into one of the best buying opportunities in years. Pimco, one of the world’s largest bond fund managers, and widely followed Guggenheim Partners are among the investors who say benchmark 10-year Treasuries yielding 3 per cent — now within reach — are too hard to resist.
Other players, such as Wall Street bond king Jeffrey Gundlach, see a lot more selling pressure to come.
“Valuations are beginning to look more interesting,” said Dan Ivascyn, group chief investment officer at Newport Beach, California-based Pacific Investment Management Co, known as Pimco, which oversees more than $1.75 trillion in assets. “We can see some further weakness in rates, especially the first half of year. But we still see limited upside for yields from here.”
Scott Minerd, global chief investment officer at Guggenheim, who helps oversee more than $260 billion in assets, agreed. “We’re waiting for 3 per cent,” he said.
“We definitely will add there. No one will perfectly time the bottom.”
Investors have already pounced on bonds even below the 3 per cent level.
On Monday, investors rushed into Treasuries as the S&P 500 and Dow Jones Industrial Average nose-dived more than 4 per cent — reversing a move on Friday when a spike in bond yields, which move inversely to prices, triggered an equity rout.
The yield on the benchmark 10-year Treasury ended the session at 2.71 per cent, down dramatically from 2.852 per cent on Friday, the highest level since January 2014.
The flight to safety trade moderated, with the yield on the 10-year Treasury rising back to 2.86 per cent, once again hitting four-year highs.
Some investors expect the move to be long-lasting: Inflationary fears, strong economic data and an announcement of bigger Treasury auctions have and will continue to drive yields higher, they say.
Indeed, the 10-year Treasury yield hit a four-year high on Friday after the latest monthly US jobs report showed solid wage gains, effectively confirming an expected rate increase at the Federal Reserve’s next meeting, in March.
Investors have been bracing for such moves in Treasuries.
Yields in the $14 trillion market for US government debt touched record lows in 2016, driven by years of aggressive central bank intervention in the wake of the 2008-2009 financial crisis to keep interest rates low to stimulate the economy.
Now, as the Federal Reserve is expected to raise interest rates three times this year and as some economists predict that the European Central Bank will start to raise rates later this year, investors are grappling with the effects of prolonged rising rates for the first time in nearly 10 years.
With inflationary pressures and massive budget deficits having become the topic du jour this year, the bond-market “vigilantes” term has made its way back onto trading floors.
The term “bond vigilantes” was coined by Ed Yardeni, the longtime Wall Street strategist now president at his namesake research firm.
Yardeni was describing the demand by investors in the 1980s for high yields to compensate for the perceived risks of inflation and budget deficits.
All told, the jump in Treasury yields has yet to make its way into the broader economy in the form of higher borrowing costs, yet it will likely start to dampen the housing and auto markets as consumer loans become more expensive, said Gary Cloud, a portfolio manager of the Hennessy Equity and Income Fund.
That, in turn, will make it less likely that the Fed raises rates more than three times this year, he said.
“We’re not haters of the bond market here at all. Treasuries look very cheap compared to other income classes” such as high-yield credit or mortgage debt, he said.
Not all prominent bond fund managers are buying in.
Billionaires Bill Gross and Ray Dalio believe the bond market is at the beginning stages of a bear market. — Reuters

David Randall