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 Some of the biggest bond firms won bets that short-to-medium dated
U.S. Treasuries and investment-grade corporate bonds would gain if
the Fed backed away from its already lukewarm stance to hike
interest rates by year-end.
Rick Rieder, chief investment officer of global fixed income at
BlackRock <BLK.N>, the world's biggest asset manager with $4.7
trillion in assets under management, told Reuters: "I had thought
that investment-grade credit had very limited value for the past few
years, but some of these spread levels are very attractive right
now."
He said he is buying investment-grade corporate credit, particularly
in the industrial sector, which is generating increased supply.
With risk premiums on investment-grade corporate bonds - the
difference between yields on those bonds and comparable government
debt - hovering near their highest in three-and-a-half years, Rieder
and other top bond managers expect that spread to narrow in a
low-rate and low-inflation climate, enhancing their overall returns.
European bonds are also worth a look, Rieder said.
The Fed's wary global view due to troubles in China and emerging
markets might cause the European Central Bank to step up its
stimulus in a bid to protect the euro zone economy, strategists
said.
Some, such as Doubleline Capital's Jeffrey Gundlach, have been
buying U.S. Treasuries, favoring five-year notes, saying "There is
not enough global growth to go around and the Fed realizes it."
Gundlach was referring to China's devaluation of its currency in
August amid signs that the country's economy – the world's
second-largest – is slowing down.
Fed Chairwoman Janet Yellen said Thursday at a press conference
following a two-day policy meeting: "Developments that we saw in
financial markets in August, in part, reflected concerns that there
was downside risk to Chinese economic performance and perhaps
concerns about the deftness in which policy makers were addressing
those concerns."
Other bond managers including John Bellows at Pasadena,
California-based Western Asset Management, which has $453 billion in
assets, said he anticipates bigger profits by owning more
longer-dated Treasuries, rather than shorter-dated issues, given the
tame inflation environment and the likelihood the Fed will
eventually raise short-term rates, even if it doesn't happen this
year.
"We prefer our duration exposure further out the curve," Bellows
said.
Heading into the Fed meeting, short-dated bond yields rose as some
investors anticipated a rate increase. The two-year note's yield
climbed to 81 basis points, highest in four-and-a-half years.
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RIGHT CALL PAYS OFF
Investors put $1.1 billion into Treasuries funds in the week ended
Sept. 16, the sixth consecutive week of inflows, according to
Lipper, a unit of Thomson Reuters.
Some of the biggest bond firms that anticipated the Fed to leave
policy rates near zero on Thursday scored gains, beating rivals who
bet on the central bank to raise rates for the first time in nearly
a decade.
Dan Ivascyn, Group CIO of bond giant Pimco, told Reuters on Friday
that the Newport Beach, Calif.-firm added U.S. Treasuries in various
maturities ahead of the Federal Reserve decision this week.
That positioning helped its flagship Pimco Total Return Fund, one of
the world's largest bond funds, post a one-week return ended Sept.
17 of 0.26 percent, surpassing 92 percent of their peers.
Barclays' U.S. Aggregate bond index, which is the most widely
followed U.S. bond market benchmark, racked up a 0.49 percent gain
on Thursday, its biggest one-day rise since early July.
On the same day, the two-year Treasury note yield <US2YT=RR> fell 11
basis points, the steepest one-day decline since December 2010. U.S.
investment-grade corporate bonds gained 0.65 percent, its biggest
single-day rise since early July, according to an index compiled by
Barclays.
With Fed's rate hike up in the air again, BlackRock's Rieder said
investors it is paramount for investors to stay nimble as financial
markets will remain volatile.
"You have to be more tactical and more flexible," he said.
(Additional reporting by Jessica Toonkel. Editing by David Gaffen
and John Pickering)
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