Global fund managers see 3% Treasury yield as attractive

Investors expect modest inflation pressure that limits bond market weakness.

  • By Emma Dunkley,
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Global bond fund managers are dubbing yields on 10-year U.S. Treasury notes as “attractive” now that this important benchmark for financial markets has risen above the “symbolic” 3 per cent threshold for the first time since early 2014.

Fixed income managers Pimco and Fidelity are among a number of investors who believe that the 10-year yield is unlikely to rise much further, reflecting a view that inflation is not going to accelerate rapidly.

Inflation erodes the value of a bond’s fixed rate of return over time. Notably the 30-year Treasury bond, whose price is far more responsive to inflation risk, currently yields 3.20 per cent, while in early 2014 it was just shy of 4 per cent.

“At 3 per cent, 10-year Treasury yields are pricing in further rates rises from the Federal Reserve, and a little bit of a premium for inflation too,” said Eugene Philalithis, a fund manager at Fidelity International.

However, he added that market indicators suggest inflation is “normalizing,” and that if inflation is being driven by rising commodity prices, the impact could be “transient.”

A spokesperson for bond fund giant Pimco said that although the fund house expects inflation to “trend higher,” which will put pressure on U.S. Treasury prices in the short term, investors expecting a “sharp rise in yield” will be “disappointed.”

In an interview with the FT, Mark Kiesel, global credit chief investment officer at the California-based manager, said in February that the jump in the benchmark Treasury yield towards 3 per cent was unlikely to go much further in the view that inflation was rising only gradually.

Long-term investors such as pension funds and insurers are likely to start buying bonds in more significant quantities, especially U.S. corporate bonds for the relatively attractive income streams, he said, therefore supporting prices.

Other investors support the view that U.S. Treasury yields are near a top.

A milestone for bonds

The yield on the 10-year Treasury note is over 3% for the first time in 4 years.

Karan Talwar, a senior investment specialist at BNP Paribas Asset Management in Asia, said that Treasury yields are trading at attractive levels relative to some of the lower-yielding local emerging and Asian bond markets.

However, other investment managers are urging caution.

Manu George, a bond fund manager at Schroders, based in Singapore, said the bond market “is likely to cheapen further” and anticipates that “there is a bit more to go before the market stabilizes.”

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