Historic sell-off draws bargain hunters to bond market

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The “inflation mania” that has gripped debt markets this year has gone too far, some investors and analysts say now is a good time to buy bonds at a discount.

A Bloomberg index of long-term US government bonds has fallen more than 18% this year, leaving it on course for its biggest drop since 1973.

Falling bond prices have pushed the 10-year Treasury yield – a benchmark for bond markets around the world – to nearly 3% as investors position themselves for a quick tightening of monetary policy from the Federal Reserve and the Fed. Other Central Banks Tackling Soaring Inflation.

But fund managers and investment banks are increasingly wondering how much more yields can rise as rapid inflation, along with interest rate hikes designed to combat it, slow economic growth. , which generally increases the attractiveness of safe assets such as government bonds.

“We consider the current 10-year level [US yields] as an essential place [to buy the debt]Bank of America rate strategists said on Wednesday. inflation as well as an increase in internet searches for “inflation”.

“Our forecast indicates that inflation will peak this quarter and fall steadily through 2023. We believe this will reduce the level of panic around inflation and allow rates to come down,” Bank of America added.

The higher payouts now assured by holding bonds are already proving tempting to some fund managers.

“My God, they are high enough to buy now,” said Al-Hussainy Edward, senior strategist in interest rates on Columbia Threadneedle. “This is what we do.” He warned, however, that rates could rise further.

“I don’t think you can be certain this is the top until you get a signal from the Fed that they’ve gone over, or you get a correction in risk assets,” Al-Hussainy said.

Even some persistent bond bears are beginning to wonder if the selloff is overdone. Dickie Hodges, who manages a $3.9 billion bond fund at Nomura Asset Management, said he had “added small exposures” to longer-term bonds as yields rose.

“I think it’s too early to call the top of yields right now,” Hodges said. “But central bankers know that a substantial increase in interest rates from these levels will push economies into recession. term are starting to look attractive.

Yet many investors worry about calling the bond cut too soon. Barclays this week abandoned a recommendation issued earlier this month to buy 10-year Treasuries after yields continued to climb. The bank said the chances of the Fed “overtightening” and pushing the U.S. economy into a “hard landing” had faded, with the central bank instead likely to allow higher inflation expectations to build. root.

A greater focus on reducing the Fed’s holdings of Treasuries – in addition to raising short-term interest rates – could also weigh more on long-term bonds, whose yields have been pushed higher. decline through asset purchases. Fed board member Lael Brainard said earlier this month that the central bank would begin a “rapid” reduction in its balance sheet that could begin as soon as its May meeting.

This possibility has left some fund managers reluctant to buy Treasuries, at least for now.

“If I could close my eyes and come back in six months, I think I’d be comfortably in the money buying here,” said James Athey, bond fund manager at Abrn. “But the potential journey to get there is so uncertain that it’s hard to find the right moment. All it takes is a big upside surprise in inflation or a vague speech from the Fed and yields rise again.

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