The worst bond rout in decades is drawing more investors to government debt, with JPMorgan Asset Management joining the growing camp of bulls.
According to Arjun Vij, a money manager at JPMorgan Asset, longer-dated sovereign notes in most developed markets are starting to look appealing, because yields are at levels last seen in 2010, according to Arjun Vij, a money manager. He said that the securities are attractive because of market expectations that inflation will be less in the coming years.
There is a decent amount of value that has been created in the long end -- it is clearly cheap relative to recent history, Vij said in a briefing. If we had to start adding bonds today, which we are doing slowly, we d like to buy the longer end. Vij is betting on government bonds in the belief that the global economy will buckle under the weight of aggressive rate hikes, along with DoubleLine Capital s Jeffrey Gundlach and Citigroup Inc. s Steven Wieting. The risk of bets being saddled with outsized losses if the bets don't work, with major central banks showing little inclination to ease the pace of tightening.
The US 10 year yields have gone up almost 80 basis points in September to head for their largest monthly increase since 2003. The yield jumped by six basis points Wednesday to top 4% for the first time since 2010, before easing back to 3.97% later in the day. The global bond rout accelerated this week as the UK plan for large tax cuts reinforced fears of more rate hikes.
There isn't a sign that the market is about to turn. Since its inception in 1990, the Bloomberg Global Aggregate Index of government and corporate bonds has lost more than 20% of its value since December. Bonds maturing in more than 10 years have lost 33%.
Vij notes that shorter-ended notes may be a riskier play, given how markets are pricing in steep rate increases from central banks. The swaps market shows that the Federal Reserve is expected to boost its target rate by 75 basis points in November for a fourth straight meeting, while the Bank of England is seen raising rates by at least double that amount.
Vij said that the money manager believes that price pressures will slow and that swaps pricing for annual US consumer price gains to fall below 3% in two years are underestimating how sticky inflation will be.