By David Barbuscia
NEW YORK (Reuters) – The company’s senior portfolio manager told Reuters that Vanguard, the world’s second-largest asset manager, believes U.S. Treasuries are nearing the end of a painful decline even as prices plunge to multi-year lows.
Yields on benchmark 10-year US Treasuries, which move inversely with prices, hit their highest level since 2011, continuing a trend that has put bonds in the midst of their worst year ever as the Federal Reserve raised interest rates dramatically to fight the rally. inflation. Markets are widely expecting the central bank to raise interest rates by another 75 basis points on Wednesday after already providing 225 basis points in tightening this year.
Portfolio managers at Vanguard believe, however, that Treasuries have already seen their worst falls and the Fed is likely to roll back its monetary tightening if growth begins to fall sharply. The Malvern, Pennsylvania corporation manages about $7.3 trillion in assets.
“The more aggressive the Fed goes, the closer we get to a hard landing scenario. And we know what happens in a hard landing situation: There will be a quick pivot… at which point it is clear that bonds start to perform again,” said John Madzier, Managing Director. Senior portfolio and head of US Treasuries and TIPS at the Vanguard Fixed Income Group.
He said Vanguard has reduced exposure to low-quality credits recently, amid expectations of more hawks at the Fed.
“If you like it, you obviously want to lean more defensively…and that by definition means you lean more toward Treasuries.”
Madziyire said previous cycles of rate hikes have shown that yields peaked before the Fed’s latest increases, or three to six months before the cycle ends.
“As long as… you have your scenarios of what potential tail risks are and you are willing to hold that position in that tail risk, you know you will be right at some point,” he said.
Graphic: Fed Funds and 10-Year Returns https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnkxdjvq/Pasted%20image%201663602059968.png
Federal Reserve Chairman Jerome Powell said price pressure can be reduced without a sharp economic slowdown. But he also stressed that the central bank will be relentless in its fight to stamp out inflation.
Expectations for the so-called final interest rate turned higher after US consumer price data showed that inflation remained strong last month.
Fed fund futures traders expect interest rates to continue to rise to a high of around 4.4% next March, more than 200 basis points higher than the current benchmark overnight rate. That’s compared to 3.8% earlier this month.
Madzier emphasized that investors “should be willing to take a little loss,” because the exact timing of the Fed’s pivot will be difficult.
“The timing of the market is close to impossible … but what you’re trying to do is try to figure out when you’re close to the end and then position it,” he said.
At the same time, income from higher yields can also help reduce losses if bond prices fall more than expected, he said.
“Even if the 10-year yields are 10 basis points higher than you would expect in the worst case, for how much return you get, you get your money back because the returns are very attractive,” he said. .