Some “lone warriors” in the investment world have begun to return to the bond market, seeking a safe haven to ride out the coming economic storm.

While Wall Street’s bond bulls have been battered this year, sentiment has shifted markedly from inflation concerns to growth concerns over the past week.

Expectations of U.S. price growth retreated from multi-year highs, with nominal yields on U.S., German, Italian and British government bonds paring earlier gains. Last week, the U.S. consumer price index rose more than expected year-on-year in April, but it did not trigger a sustained meltdown in the bond market. This may be a sign that the bond bear market is beginning to come to an end after an all-time bad start.

With inflationary pressures still rampant everywhere, few can be confident that bond yields have peaked in any of the world’s major markets. But there is an argument that bonds remain a powerful hedge as aggressive Fed tightening moves could lead to a downturn in the U.S. economy and ripple through global assets.

Mark Holman, partner at Twenty-four Asset Management, a London-based investment firm focused on fixed income securities, said:

We have just started buying U.S. Treasuries. I’m glad yields have gone up so much. Because I know it’s late in the cycle and we’re going to need to hold some Treasuries.

Equities and credit markets in developed countries continued to fall this month, with the economically sensitive tech sector taking a sharp hit, pushing U.S. Treasuries into their biggest inflows since March 2020. Despite their recent surge, German bunds appear to be more vulnerable given that the ECB’s tightening measures have yet to take effect. That hasn’t stopped strategists such as Citigroup from believing, however, that the decline in German bunds will reverse as worries about global growth outpace inflation expectations.

Howard Cunningham, fixed income manager at BNY Mellon Investment Management, said:

Government bonds can begin to hedge against risks in other areas. We don’t expect the upward trend in yields to reverse, but government bonds can start to play a role. Now, sometimes you see a negative correlation between bonds and the stock market.

U.S. government bonds have fallen 8.4 percent this year through Thursday, according to Bloomberg indexes, which would be the first two-year decline in at least 50 years; the Bloomberg Global Bond Aggregate Index fell 12 percent. However, the 10-year U.S. Treasury yield has fallen nearly 30 basis points since hitting a four-year high of 3.2% on May 9. Meanwhile, stocks fell sharply as the Russian-Ukrainian conflict and coronavirus lockdowns heightened concerns about economic growth.

Separately, a deep dive into the derivatives market shows that hedge funds are currently trimming exposure to bearish U.S. Treasuries, pulling yields lower.

Fed tightening still far ahead, U.S. Treasuries more favored?

Companies such as Candriam and AXA Investment Management see U.S. Treasuries as a better investment than German bunds right now. Implied market expectations suggest the Fed will start cutting rates as early as 2024 after raising the funds rate to just above 3% next year.

Nicholas Forrit, head of global fixed income at Candriam, said:

We started thinking about buying US Treasuries. U.S. Treasury yields are more reasonably priced because the rate hike cycle has begun. Europe is definitely behind.

He added that German two-year bond yields were around 0.11% on Friday, which is “too low” considering the year-end deposit rate is likely to be 0.25%.

The ECB is not expected to start raising rates until July, and traders see no rate cut for at least the next four years. On this trajectory, U.S. Treasury prices will get a strong boost through the Fed’s easing cycle as Germany faces headwinds from monetary policy tightening.

But things are not so clear. Mark Healy, portfolio manager at AXA Investment Management, believes that gilts are looking a relatively safe place for now given the ongoing tightening by the Bank of England, but euro zone bonds may still offer an opportunity. He said:

We are most bullish on UK Treasuries, followed by US and Eurozone Treasuries, and while we may delay expectations for an ECB rate hike a bit, going forward, Eurozone government bonds can provide value.

But Deutsche Bank’s Pollack warned that the sell-off in Treasuries wasn’t overdone, given continued price pressures on everything from leasing costs to airfares.

The head of Private Wealth Management Fixed Income said:

While we expect inflation to fall, the question is, will the market be happy with the fall in inflation? That’s why I’m hesitant to suggest buying now.

This article is reprinted from: https://news.futunn.com/post/15560105?src=3&report_type=market&report_id=205714&futusource=news_headline_list
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