Time is running out for the ‘Year of the Bond’

NEW YORK: The tagline from Wall Street was that 2023 was the year of the bond. Instead, fund managers are coming to terms with one of the toughest years ever.

Lacy Hunt, Hoisington Investment Management Co’s 81-year-old chief economist, who’s been analysing markets, Federal Reserve policy and the economy for around a half-century, said it’s been the hardest of his entire career.

At HSBC Holdings Plc, Steve Major said he was “wrong” to assume the US government’s growing supply of bonds didn’t matter.

Earlier this month, Morgan Stanley finally joined Bank of America and moved to a neutral position on treasuries.

“It’s been a very, very humbling year,” Hunt said. A 13% year-to-date loss for the firm’s Wasatch-Hoisington US Treasury Fund comes on top of 2022’s 34% drop, data compiled by Bloomberg showed.

Treasuries declined yesterday as concerns eased that the Israel-Hamas war would escalate to engulf other countries in the Middle East.

The yield on 10-year US notes rose five basis points to 4.66%. That’s nearly 80 basis points higher than where it started 2023.

Last year’s steep losses were easier to explain to clients. Everyone knows bond prices suffer when inflation is high and central banks are driving up interest rates.

The expectation in 2023 was that the US economy would crater under the weight of the sharpest run of hikes in decades, bringing gains for bonds on the expectation of policy loosening to come.

Instead, even as inflation slowed, jobs data and other key measures of the economy’s health remained strong, keeping the threat of faster price growth ever-present.

Yields catapulted to highs not seen since 2007, putting the treasury market on course for an unprecedented third year of annual losses.

And without the Federal Reserve in the market buying bonds to hold down borrowing costs, the US’ massive deficits, and the ballooning issuance needed to plug them, now matter in a way they didn’t before.

Hoisington’s Hunt and his colleagues constantly discussed whether to conduct a wholesale alteration of their favourable view on long-term debt, as their assumption that slowing inflation would curb yields failed to materialise.

They did trim their duration earlier in the year, but not sufficiently.

“We thought that inflation would come down and it did,” Hunt said.

“In fact, there has been no decline that large in inflation that has not been involved with a recession in its immediate aftermath in the past.

“So the fact that gross domestic product is still rising is unprecedented.”

At the same time, it’s the expectation that a contraction will eventually happen that’s keeping Wall Street’s bruised bulls from retreating too far as they try to manage their so-called constrained funds that can invest solely in the treasury market.

“A hard landing is coming,” Hunt said.

Bob Michele, chief investment officer for fixed income at J.P. Morgan Asset Management, trimmed the overweight position he’d built in treasuries when 10-year yields hit 4.30%.

They’ve risen by more than 50 basis points since. While the current levels look attractive, the 40-year bond-market veteran is waiting for the dust to settle.

“We have to respect the market technicals and see where this can wash out,” said Michele, who earlier this year predicted yields could come down as low as 3% across the curve by August.

If yields on longer maturities go above 5.25% and the employment market stays firm, then it’s time to retreat for real, he said.

For a year touted by the likes of Vanguard Group Inc and private equity giant KKR and Co Inc as the point where treasuries roar back, an “anchor in the storm”, Michele said at the time, the reality has been sobering.

Since April, the 10-year treasury yield has posted back-to-back monthly gains.

And while the bond market has clawed back some losses in the past week, it’s fuelled by traders hunting the least-risky assets as the war between Israel and Hamas stokes fears of escalation. — Bloomberg “We have to respect the market technicals

and see where this can wash out.”Bob Michele