Bond Market Faces Quandary After Fed Signals It’s Almost Done
Bond investors face the crucial decision of just how much risk to take in Treasuries with 10-year yields at the highest in more than a decade and the Federal Reserve signaling it’s almost done raising rates.
While individuals are piling into cash, for many portfolio managers the debate now is about how far to go in the other direction. Two-year yields above 5% haven’t been this lofty since 2006, while 10-year yields eclipsed 4.5% on Friday for the first time since 2007.
For Ed Al-Hussainy at Columbia Threadneedle, the sweet spot now is in the shorter-dated notes, which would likely perform well in the event the Fed pivots to rate cuts within a couple of years. That maturity also avoids the added risk of longer tenors, which have delivered the most pain to bond investors in 2023 as yields surged broadly amid a resilient economy and swelling Treasury issuance.
“Unless you think the Fed’s going to be on hold for two years,” yields above 5% “present pretty good value,” said Al-Hussainy, a global rates strategist. “The longer end is where you get hurt the most.”