Analysis: U.S. bond managers say market has broken limits and yields are too low


US dollar banknotes can be seen in front of the stock chart displayed in this illustration taken on February 8, 2021. REUTERS / Dado Ruvic / Illustration / File Photo

NEW YORK, July 8 (Reuters) – Investors in some of America’s biggest asset managers are clinging to the idea that bond yields will rise in the second half of this year, despite the recent decline in Treasury yields, which ‘they see it as a temporary move.

The unwinding of the short-term bets against Treasury debt along with growing concerns about the recovery in the US labor market and the spread of the Delta variant of the coronavirus have pushed down yields on longer-term US government bonds. The benchmark 10-year yield hit 1.296% on Wednesday and the 30-year yield fell to 1.918%, the lowest since February for both.

But major US bond managers, including BlackRock, PIMCO, DoubleLine and TCW, still expect the reopening of the economy to spur growth and inflation, even at a slower pace in the second half of this year, and sends the yields up again. They see the broader drop in yields since mid-May and the accelerated decline on Tuesday and Wednesday, largely the result of investors unwinding an over-bet earlier in the year on higher rates.

“The view for a while there in February and March seemed very clear,” said Gregory Whiteley, US government securities portfolio manager at DoubleLine. “Everyone was getting on board, everyone was starting to run out, every strategist you heard of were asking for higher rates by the end of the year.

“And it looks like it took a bit of a lead,” he said. “Everyone was on one side of the boat, everyone had the same vision, and then the doubts started to set in.”

But Whiteley said bond yields have “gone too far lower now, so we have passed the other way.”

Some traders said this week’s move was due to an unwinding of bets by hedge funds. A weekly survey of JPMorgan clients on July 6 showed that net bearish bets against Treasuries fell to their lowest level since April. Read more

“The recent rally has not changed our fundamental outlook. This move to us seems more technical,” said Bret Barker, cash portfolio manager at TCW, who sees the 10-year yield at 1.6% -2% by the end of the year. .

A June Reuters poll showed bond strategists expected the 10-year yield to reach 2.0% by June 2022. read more

The so-called reflation trade – which bets on skyrocketing inflation and growth – pushed yields back to pre-pandemic levels in March. But longer-term yields have fallen due to falling inflation expectations. Read more

Employment data for April, May and June, which showed a mixed picture of the recovery in the US labor market, also dampened some growth expectations. Data on Tuesday showed that activity in the US service sector grew at a moderate pace in June.

“At the moment, the reflation trade is not dead, but it is certainly in hibernation,” said Michael Sewell, portfolio manager at T. Rowe Price, who sees returns rising, although he believes the 10 years peaked for 2021 in March at 1.776%.

Erin Browne, portfolio manager for multi-asset strategies at bond giant PIMCO, pointed to a “fairly significant flattening” in the yield curve in recent months, driven by equilibrium rates of inflation that have fallen since they reached multi-year highs in mid-May.

The spread between two- and ten-year yields – the most common measure of the yield curve – has narrowed by more than 50 basis points since it hit a six-year high in March.

“All of this tells you that the market is reaching this peak of growth, this peak of inflation. And it’s really accelerated yesterday and today,” Browne said.

This week’s decision caused yields to fall below fair value, said Browne, who expects the 10-year yield to be between 1.5% and 2% in the second half of 2021.

Asset managers have been looking for ways to take advantage of the moves. BlackRock, in its mid-year investment outlook presented on Wednesday, said it viewed current bond market valuations as “very full” and turned more bearish on US Treasuries.

“We took this opportunity for lower yields to establish a shorter or more underweight duration position,” Scott Thiel, chief fixed income strategist at BlackRock, said during the presentation.

Reporting by Kate Duguid; additional reporting by David Randall; edited by Megan Davies and Leslie Adler

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