Yields on 10-year U.S. Treasuries hit a 2016 high in the days following the U.S. presidential election, but asset owners won't be boosting bond allocations just yet.
Their reasoning: It's unclear whether higher yields are here to stay.
The 10-year U.S. Treasury yields surged 40 basis points in the week ended Nov. 18 to 2.3%, rising to close at 2.35% on Nov. 23, the highest level this year, as markets evaluated the impact of U.S. President-elect Donald J. Trump's upset and expectations of rising interest rates and inflation.
Bern-based David Engel, portfolio manager at the 36.5 billion Swiss franc ($39.9 billion) Swiss Federal Pension Fund PUBLICA, which as a collective comprises 20 pension funds, said: “Generally higher yield is positive for the overall fund, including liabilities. (Nevertheless) our strategy hasn't changed,” he said.
“Since Mr. Trump hasn't even taken up office yet, we consider the current move to be a market overreaction and therefore bond prices to at least stabilize in the foreseeable future, before they start to fall, due to higher inflation expectations and a more hawkish attitude from the (U.S. Federal Reserve),” said Arnd Sieben, Munich-based, CIO of BayernInvest Kapitalverwaltungsgesellschaft.
Fiscal measures touted by Mr. Trump, including big tax cuts and increased infrastructure spending, solidified the expectation among global managers that the Fed will increase rates at its next meeting in mid-December.
Asset owners and money managers say they have anticipated these developments. The fact that bond yields are going up at this point in the economic cycle did not surprise them as much as the fact they did so soon after Mr. Trump's victory.
Mr. Sieben, whose capital management company, KAG fund, BayernInvest is part asset owner and part manager, said he doesn't expect institutional investors to immediately tune asset allocation in favor of bonds.
“Those (investors) that need to serve regulatory requirements are limited and those that need to meet nominal liabilities will have to wait for even higher yields to occur,” he said.
Luiz Cardosa, CIO of the $1 billion Nucleos-Instituto de Seguridade Social, Rio de Janeiro, agreed with Mr. Sieben.
“We believe rates have to go up before institutional investors come back to the market.”
Mr. Cardosa said the impact of Mr. Trump's election was “that our yield curve was lifted because of expectations that he may implement a more active fiscal policy increasing government expenditures.”
He added “the central bank (in Brazil) has just started to reduce the short-term rate last month, therefore we will not move any money to U.S. 10- or 30-year Treasuries.”
David Morton, chief market strategist at Rocaton Investment Advisers LLC based in Norwalk, Conn., said “some asset owners with long-term views see elevated yields as an opportunity to reinvest cash flow at a higher rate ... definitely a positive development for asset owners.”