The global bond market rout triggered by Donald Trump’s US election victory looks overdone, according to bond investors now betting that the sell-off was too violent and that borrowing costs will remain contained into the start of the new year.
Mr Trump is expected to unveil a large, inflation-fuelling economic stimulus package of infrastructure spending and tax cuts, which has stoked fears of an end to the three-decade bull market in bonds. The global fixed income market lost more than $1.8tn of value over the past two weeks, sending yields — which move inversely to prices — to a nine-month high on Friday.
But some big investors are betting that the bond turmoil has been excessive, and are dipping back into the market, especially in areas such as US corporate debt, which now offers more attractive returns.
“There’s a greater chance of higher rates than before, but the fundamental backdrop — much greater global demand for dollar fixed income than supply — means they will stay low,” said Tod Nasser, chief investment officer of Pacific Life, an insurer. He is ramping up purchases of US corporate bonds in particular. “We want to be a bit more aggressive now,” he said.
The yield on 10-year Treasuries, one of the most closely followed rates, has climbed from 1.77 per cent ahead of the US presidential election to 2.35 per cent on Friday, the highest level since last December. That move has reverberated across debt markets, but many analysts and fund managers have pointed out that the details — and practicality — of many of Mr Trump’s plans remain unclear.
DoubleLine chief executive Jeffrey Gundlach said last week that he would be adding to his holdings of Treasuries on days during which the benchmark notes weaken, while Loomis Sayles portfolio manager Scott Service said he wanted to have cash available to take advantage of “bouts of volatility”.
“The reset in rates is positive,” Mr Service said. “There is a significant amount of cash that needs to be put to work and the yields are now much more attractive.”
Money managers said that while many mutual fund investors might wait for more certainty before diving in, pension and insurance funds are likely to have found the rise in long-term yields particularly attractive, given their long-term liabilities and the acute shortage of healthy, safe fixed income returns for much of 2016.
For that reason, some investors are sceptical that the post-crisis market regime has truly changed. Despite the recent ructions there are still $11.8tn worth of bonds trading at sub-zero yields, according to Tradeweb, underscoring the attraction of positive-returning fixed income securities in a world swimming with central bank-supplied liquidity.
“I don’t think the paradigm has changed yet,” Mr Nasser said. He added that while some investors were hoping for a rise in yields, “I don’t think much higher rates are on the cards in the short term”.
Henry Peabody, a bond fund manager at Eaton Vance, pointed out that investors appeared to have reached consensus on the president-elect’s plans “in record speed”, and said that it was a good time for investors to take advantage of the subsequent turbulence.
“While looser fiscal policy is likely, and along with it implications for growth, inflation, monetary policy, and ultimately interest rates, there are still a lot of unanswered questions,” he said.