Big investors are snapping up US Treasuries, seeking to lock in the highest yields in decades as they bet borrowing costs can only climb so much further before a months-long sell-off abates. Investors have injected almost $14bn into US government bond funds since the start of October, after net inflows in the third quarter reached a record $59.3bn, according to FT calculations based on EPFR data. Although the flows represent just a small sliver of the $32tn Treasury market, fund managers said the 1.06 percentage point surge this year in 10-year Treasury yields to 5.24 per cent was making bonds look more attractive.
Investors’ warming views towards Treasuries come after a powerful rout in recent months triggered by the rise in energy costs caused by President Donald Trump’s Iran war, big issuance of debt by AI companies and expectations that US economic growth will be vigorous in coming years. While many fund managers are reluctant to call an end to the selling, they are also looking for opportunities to secure juicy fixed returns for years to come. Higher yields have driven investors to recent Treasury auctions in droves. Demand was strong for the $39bn of 10-year notes on offer last Wednesday, sold just hours after yields reached a 24-year peak of 5.36 per cent, with primary dealers — the big banks responsible for absorbing any of the supply not bought up by investors — recording the lowest participation rate since 2003. The three- and 30-year auctions last week were also robust.
The appeal of 10-year Treasuries was also being bolstered by market-based expectations that inflation will only average around 2.35 per cent for the next decade, providing a “real” return of almost 3 per cent, Mortier said. Dan Ivascyn, chief investment officer at $2.3tn-in-assets bond giant Pimco, said that while Treasuries could continue sliding, pushing yields higher, they looked attractive compared with stocks trading near record highs. Corporate bonds also offered scant additional compensation for the risks investors were taking compared with ultra-low-risk US government debt.
Many investors remained concerned about purchasing bonds with longer maturities, which are more vulnerable to risks that the Fed will kick off a cycle of interest rate rises, following last month’s increase, to quell inflation. “I’m not sure I would go out to 30-year Treasuries,” said Peters. Similarly, Vishal Khanduja, head of broad markets fixed income and portfolio manager at Morgan Stanley Investment Management, flagged maturities up to 10 years as “attractive”, while “our conviction level for 20 and 30 years is lower”.
Source: Financial Times Markets · Summarized by HeadlinesBriefing