Quant Pioneer Dimensional Buys Bonds That Ray Dalio Hates

A quant pioneer with $112 billion in fixed income assets is defying doom-mongers like Ray Dalio as it places a bullish wager on interest-rate risk.

Spurred by groundbreaking insights on systematic investing from its Nobel Prize-winning adviser Eugene Fama, Dimensional Fund Advisors has been extending duration in its core bond portfolios this year.

Fama-inspired research spanning decades of market history over thousands of securities shows longer-dated bonds have plenty to offer now that forward rates are on the march. Thank the combination of a steepening U.S. yield curve and the rising compensation for holding long-term Treasuries, or the term premium.

All that is spurring the allocation models that guide David Booth-founded Dimensional to flash buy signals across the asset class.

The Austin, Texas-based manager’s conviction adds to the Wall Street divide over the world’s biggest bond market as inflation breaks out and debt burdens swell.

“Rising interest rates do not automatically imply a negative return for a bond,” said Dave Plecha, the global head of fixed income at Dimensional, which has some $650 billion in assets overall. “We develop portfolios with higher expected returns than the benchmark and over the years we’ve delivered on that.”

Treasuries have taken big hit this year thanks to a sharper-than-expected economic rebound spurred by the rollout of vaccines for Covid 19. While Federal Reserve officials insist inflation will prove transitory, data this month showed U.S. consumer prices climbing in April by the most since 2009. The market-derived outlook for consumer price growth over the next decade, or the breakeven rate, is around 2.4%. In last year’s pandemic crash, it hit as low as 0.47%.

That’s prompted the likes of Bridgewater Associates founder Dalio to lambaste the safety of Treasuries and tout the hedging potential of Bitcoin as an alternative, with onetime debt king Bill Gross also among naysayers.