Some of the world’s top money managers are sitting on a windfall after the collapse of Silicon Valley Bank spurred the biggest rally in US Treasuries since the early 1980s.
Schroders Plc, Fidelity International and M&G Investments are among funds which initiated bullish bets on Treasuries before the failure of several US lenders forced a rethink of the Federal Reserve’s rate-hike path. Now they’re gearing up for even more gains as rising risks of a downturn fuel demand for havens.
“We prefer to now be positioning for recession,” said Kellie Wood, money manager at Schroders, who has bullish positions in two-year US government debt. “It’s hard to see Treasuries selling off too much from here.”
Traders are rushing to recalibrate expectations for Fed rates after SVB’s downfall triggered a tsunami of volatility that’s jolted everything from the US economy to Japan stocks and corporate debt. Yields on two-year Treasuries — which are most sensitive to interest-rate changes — tumbled as much as 65 basis points Monday in a move that surpassed even the period surrounding Black Monday’s stock-market crash in 1987.
The notes whipsawed on Tuesday, with yields rising as much as 22 basis points to 4.19% before falling as low as 3.82%.
“We’re still constructive on duration overall,” said George Efstathopoulos, money manager at Fidelity International. Recent events “could lead to a lower terminal rate in the US with fewer rate increases” going forward, he added.
The fund turned “more constructive” on Treasuries as yields hit around 4%, and eased off “a bit when we’ve gone to the three, close to 3.5%,” he said.
Fed Pause
As US authorities try to stem the fallout from SVB’s failure, the risk of a recession is front-and-center for investors who are worried that the Fed’s aggressive tightening is starting to hurt corporates and consumers.
M&G, which had been increasing its US government bond exposure across some funds, reckons the crisis may prompt the Fed to pause as soon as next week. Goldman Sachs Group Inc. shares that view, while Nomura Securities has gone a step further to forecast a cut and a halt to bond sales.
“Monetary policy all of a sudden appears a lot tighter than it did a few days ago,” said Pierre Chartres, M&G fixed-income investment director in Singapore. “It should make the Federal Reserve pause or at least think quite seriously about the pace of future rate hikes.”
PineBridge Investments also thinks the Fed may hold fire next week, which is likely to fuel further gains in Treasuries.
The Fed’s “financial stability mandate takes precedence over the inflation” mandate in episodes such as those in today’s markets, said PineBridge money manager Omar Slim, whose Asia Pacific Investment Grade Bond Fund beat 92% of its peers in the past five years. “Pausing is a real possibility.”
2% Yields
Asset Management One Co. is another money manager that’s netting a gain from the rally in Treasuries. Back in early March, its fund manager Akira Takei had been positioned for US yields to drop and the curve to steepen — a call that is now proving to be prescient.
The Tokyo-based money manager expects 10-year US yields to fall to 2% in the third quarter from around 3.5% now as fears of a downturn increase.
“The US economy has one foot in recession,” said Takei, whose company oversees the equivalent of $460 billion. Should the Fed be reluctant to lower the policy rate swiftly, “the bond market will demand it,” and the yield may fall much more than that, he said.
Franklin Templeton Investment Australia’s Andrew Canobi agrees benchmark US yields may hit 2%, even if it’s not a base case scenario for the money manager whose funds have benefited from long positions in US and Australia government debt.
US yields “can go well through 2% if the world does go into a hard recession,” he said. “There’s likelihood yields can overshoot on the downside in the short term, but volatility is so high that yields can go higher and present a buying opportunity.”
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