US Treasuries at the long end of the yield curve are being favoured by fixed interest portfolio mana...
US Treasuries at the long end of the yield curve are being favoured by fixed interest portfolio managers who believe the US economy is slowing down.
Evidence of a slowing US economy came in May with unemployment rising to 4.1% from the 30 year low of 3.9% recorded in April.
US retail sales also fell in May, the second monthly decline in a row while new home construction fell to its lowest level in a year in the same month.
Another concern for bond markets is the effect rising oil prices may have on inflation. Crude oil prices have risen by 33% since April in dollar terms and are close to a nine-year high, leading petrol prices in some parts of the US to rise to more than $2 a gallon.
Alan Wilde, director of fixed interest at Abbey National Asset Managers, is favouring longer dated Treasuries in the belief yields are set to fall this year.
He says the tightening of monetary policy by the Federal Reserve is having an impact on slowing down the economy. This will lead to lower long-end Treasury yields on a three to six month view as the bond markets become less concerned about inflation.
Wilde is keen on Treasuries with durations of 10 years and over, with 10 year on a yield of 6.15%. Treasuries at the 30 year end of the yield curve are on a yield of 6.03%. Wilde believes 10 year yields could get down to 5.75% by the end of the year.
Colin Harte, director, international bonds at Morley Fund Management, the investment arm of CGNU, is also favouring longer dated US Treasuries. He is keen on the 10 and 30 year end of the curve but is not favouring the short end and, for example, has an underweight position in two year Treasuries.
Harte expects yields to increase at the short end of the yield curve in an environment of rising US interest rates. Two year US Treasuries are currently offering a yield of 6.5%.
Harte says: "Our view of the US is it will slow eventually. We are currently slightly long on duration and are looking for yields to rise in the short term in the US. The most vulnerable is the very short end, such as two year Treasuries, which could get badly hit."
Wilde says: "We are slightly long in terms of duration at the moment. This position is predicated on the continuation of the growth slowdown story in the US economy. We think there is evidence that higher interest rates in the US are beginning to bite. There is the risk of data, such as new labour market information, contradicting that to some extent, but we are looking for yields to drop particularly in the final quarter of the year."
Wilde believes the prospects for the US stock market could also improve the outlook for Treasuries. He says: "The US equity market is vulnerable, not because of the macro picture but because of margin pressures. Analysts believe we are set for disappointments in some sectors of the economy. I think we are past the point of having a big shake-out on the back of, for example, US interest rate rises."
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