OVERVIEW
MANAGEMENT
PERFORMANCE
POSSIBILITIES
CAPITALS
ACTIVITIES
ACTORS
BURGESS
|
INVESTMENT
TURMOIL ION FINANICAL MARKETS Another dark day on Wall Street ... with Treasury yields at decade highs Original article: Peter Burgess COMMENTARY Peter Burgess | ||
|
For most of modern investing history, cash has carried a connotation of indecision: Any allocation to money-market funds or Treasury bills—considered cash equivalents—was merely a way station en route to more definitive investment decisions. But with the US Federal Reserve cranking interest rates ever higher, cash has become a bona fide asset class.
Original article: https://www.bloomberg.com/news/articles/2022-09-20/wall-street-is-starting-to-believe-in-bonds-again-on-4-yields
Written by Eva Szalay @eva_szalay and Denitsa Tsekova @denitsa_tsekova September 20, 2022 at 4:42 PM EDT A ray of light shimmering through another dark day on Wall Street: Treasury yields at decade highs are now tempting big money managers from BlackRock Inc. to Amundi on the conviction that the asset class will deliver the hedging goods in the next downturn. That tentative shift in the investment landscape may soon offer respite for traders rocked by the historic selloff in the world’s largest bond market this year. With equities crumbling ahead of Wednesday’s Federal Reserve gathering -- where officials are expected to boost rates by 75 basis points for the third time in a row -- short-term US yields are trading near 4% for the first time since 2007. At the same time fixed income is dangling the biggest rewards relative to equities in more than a decade. All that has investors including those at JPMorgan Asset Management turning more constructive on global government debt that’s lost almost a fifth of its value this year, according to Bloomberg data. “Without a doubt fixed income will be back with a bang,” said Ursula Marchioni, head of BlackRock portfolio consulting EMEA. So while it won’t solve the problem of near double-digit losses in debt portfolios this year, the thinking goes that bonds are now in a better position to eke out gains in any economic downturn ahead -- something that could in turn revive faith in the trillion-dollar 60/40 investing complex. Treasury yields trounce equity dividends On Tuesday ahead of Fed day, the S&P 500 index extended declines following its worst week since June 17, while Treasury yields notched fresh multiyear highs and a 20-year bond auction was well received amid juicy yields. The central bank’s campaign to subdue inflation even at the risk of stoking a recession is in theory renewing the appeal of fixed income as a way to guard against both an economic and stock-market bust. “Some parts of the fixed income environment are attractive again, and can provide diversification for portfolios at this point, which wasn’t the case a few months ago,” Vincent Juvyns, global market strategist at JPMorgan Asset Management, said in an interview on Bloomberg TV. At the same time some corners of Wall Street money management are wagering that the much-maligned balanced investing strategies will stage a comeback thanks to higher starting yields. “The 60/40 portfolio is definitely not dead, in fact, after the repricing that we’ve seen this year across fixed income markets, we would argue that it’s very much alive,” said Erin Browne, portfolio manager for multi-asset strategies at Pimco. “We now see real value in several segments of the fixed income market, including investment grade bonds, mortgages and securitized products.” Read more: Bear Market Leaves Bond Investors With Few Places to Hide The 60/40 strategy is on course for the first quarterly gains this year as stocks recoup some of their losses from June lows, according to a Bloomberg index. More broadly as the Fed makes headway in its inflation battle, the hope is that bonds will have more capacity to hedge stock meltdowns, says Vincent Mortier, chief investment officer at Amundi, Europe’s largest fund manager. “It was the perfect storm in terms of returns but negative correlations are coming back into the marketplace, which means bonds will become diversifiers again,” he said. “It’s time to look at bonds again.” Traditional Search for Safety No Panacea During most years when the 60/40 portfolio delivered negative returns of more than 1%, the successive three to five years produced double-digit annualized gains, according to Wells Fargo Investing Institute. For example, after the classic portfolio was down 21.6% in 2008, it returned an average of 11.9% in the following four years through 2011. Given these investing lessons from history, bond bears are getting less pessimistic. Paul O’Connor, the head of Janus Henderson’s multi asset team for the UK, for example, has been closing out an underweight position on fixed income to hedge a deeper equity drawdown. “If you look at yields it’s beginning to look very interesting from a total returns perspective,” O’Connor said. “After a repricing of short-term rate and inflation expectations, it’s becoming plausible that bonds will regain a useful role in a multi-asset portfolio.” — With assistance by Allegra Catelli Original article: https://www.bloomberg.com/news/articles/2022-09-30/cash-is-king-as-the-fed-wrestles-inflation Cash Retakes Its Crown as the Fed Wrestles With Inflation Investors are piling into products that shield them from losses in a rising rate environment. Photo Illustration: Zak Tebbal for Bloomberg Businessweek; Photos: Getty Images (4) Written by Katherine Greifeld ... @kgreifeld September 30, 2022 at 5:00 AM EDT For most of modern investing history, cash has carried a connotation of indecision: Any allocation to money-market funds or Treasury bills—considered cash equivalents—was merely a way station en route to more definitive investment decisions. But with the US Federal Reserve cranking interest rates ever higher, cash has become a bona fide asset class for the first time in decades. Rates on three-month Treasury bills are hovering near 3.3%, the highest since 2008, while six-month bills yield 3.9%. The latter is above the 10-year Treasury note’s yield but with negligible duration risk—a measure of sensitivity to interest rate changes, which can be particularly destructive in extreme market environments. “Guaranteed 3-plus percent on T-bills? You have no duration, you have no credit risk—you have no risk,” says Jason Bloom, Invesco’s head of fixed income, alternatives, and ETF strategies. “That looks amazing right now.” Risk assets and havens alike are shuddering as a hawkish Fed attacks inflation. The central bank delivered its third consecutive 75-basis-point hike on Sept. 21, while raising projections for increases to come. Although that’s shredded returns for longer-dated fixed-income securities, it’s meant that simply holding bills to maturity and collecting interest payments—what the industry calls coupon clipping—is a reasonable strategy. That logic’s fueled a $32 billion flood this year into exchange-traded funds that hold debt maturing in one year or sooner, a breath away from the record $34 billion haul in 2018, the last time the Fed was tightening, Bloomberg Intelligence data show. Roughly $4.6 trillion is sitting in US money-market funds, near the record high of $4.8 trillion in 2020. The shift to cash comes at the expense of other assets—namely, stocks. The S&P 500 has swooned about 23% from January’s peak, dragged down by ultrahot inflation and the Fed’s aggressive campaign to smother it. The jumbo hikes have all but extinguished the buy-the-dip mentality that defined pandemic-era markets; the increases are snuffing out speculative impulses and boosting returns on the good ol’ greenback. “People are just going into cash,” says Chris Gaffney, president of world markets at TIAA Bank. “If you’re OK sitting at a 4% yield, which doesn’t look that bad in this kind of environment with all the questions of where we’re headed, you can park.” The unusual market dynamics look set to last. Fresh projections from the Fed’s September meeting show policymakers expect interest rates to reach 4.4% by yearend, then rise to 4.6% in 2023, where they could stay “for some time,” Federal Reserve Bank of Cleveland President Loretta Mester said in September. Rising rates mean that checking and savings accounts at commercial banks will pay more interest than in recent years. But those benefits come with a lag compared with cash-like ETFs, because banks are slow to pass on higher interest rates, says Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. Meanwhile, in the money-market universe, the vast majority of holdings now earn upwards of 2%. “A big aspect of why cash is attractive is, in short order, you’re going to take advantage of higher policy rates,” Suzuki says. “The more floating you can get your vehicle, the more beneficial that will be in a rising policy rate environment.” Even with yields around 4% on 12-month Treasury bills, that’s still not enough to keep up with inflation that tops 8% a year. So in real terms, returns on cash equivalents are still negative. But that’s just a detail when assets across the risk spectrum are in a sell-everything mode, Suzuki says. To do well over the long term, “a lot of that performance comes from going down less,” he says. “So you may complain about negative real returns, but look at most assets today: You have massive losses on a real and nominal basis.” Almost 20% of Bernstein’s flagship fund, which held $7 billion in assets at the end of August, is in cash and cash-like assets at the moment, Suzuki says. That’s the highest level in the firm’s history, and compares with a long-term average of less than 5% prior to a year ago. Holding cash does carry an opportunity cost if the mood music shifts abruptly. That was the case on Sept. 28, when the Bank of England’s pledge to begin buying UK gilts again sparked a rally in beaten-down US stock and bond markets. And for brave bond investors, a climb in yields across the curve beckons beyond the safe harbor of cash. That allure will grow stronger when inflation eventually cools and the Fed approaches the end of its tightening cycle. “At some point you’re going to have to move out the yield curve to lock in longer-term yields,” says Kathy Jones, chief fixed-income strategist at Charles Schwab & Co. “People will eventually have to start migrating out. I don’t think they will until they’re sufficiently convinced that the Fed is done.” —With Vildana Hajric and Isabelle Lee
| The text being discussed is available at | and |