Bond bears smell blood, others claw for buying
opportunity
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[February 06, 2018]
By David Randall
NEW YORK (Reuters) - Some of the biggest
U.S. investors believe the bond market has slipped into a bear phase.
Others believe it has turned into one of the best buying opportunities
in years.
Pimco, one of the world's largest bond fund managers, and widely
followed Guggenheim Partners are among the investors who say benchmark
10-year Treasuries yielding 3 percent - now within reach - are too hard
to resist. Other players, such as Wall Street bond king Jeffrey Gundlach,
see a lot more selling pressure to come.
"Valuations are beginning to look more interesting," said Dan Ivascyn,
group chief investment officer at Newport Beach, California-based
Pacific Investment Management Co, known as Pimco, which oversees more
than $1.75 trillion in assets. "We can see some further weakness in
rates, especially the first half of year. But we still see limited
upside for yields from here."
Scott Minerd, global chief investment officer at Guggenheim, who helps
oversee more than $260 billion in assets, agreed. "We’re waiting for 3
percent," he said. "We definitely will add there. No one will perfectly
time the bottom."

Investors have already pounced on bonds even below the 3 percent level.
On Monday, investors rushed into Treasuries as the S&P 500 and Dow Jones
Industrial Average nosedived more than 4 percent - reversing a move on
Friday when a spike in bond yields, which move inversely to prices,
triggered an equity rout. The yield on the benchmark 10-year Treasury
ended the session at 2.71 percent, down dramatically from 2.852 percent
on Friday, the highest level since January 2014.
Some investors doubt the flight to safety into Treasuries will be
long-lasting: Inflationary fears, strong economic data and an
announcement of bigger Treasury auctions have and will continue to drive
yields higher, they say.
Indeed, the 10-year Treasury yield hit a four-year high on Friday after
the latest monthly U.S. jobs report showed solid wage gains, effectively
confirming an expected rate increase at the Federal Reserve’s next
meeting, in March.
Investors have been bracing for such moves in Treasuries.
Yields in the $14 trillion market for U.S. government debt touched
record lows in 2016, driven by years of aggressive central bank
intervention in the wake of the 2008-2009 financial crisis to keep
interest rates low to stimulate the economy.
Now, as the Federal Reserve is expected to raise interest rates three
times this year and as some economists predict that the European Central
Bank will start to raise rates later this year, investors are grappling
with the effects of prolonged rising rates for the first time in nearly
10 years.
With inflationary pressures and massive budget deficits having become
the topic du jour this year, the bond-market "vigilantes" term has made
its way back onto trading floors.

The term "bond vigilantes" was coined by Ed Yardeni, the longtime Wall
Street strategist now president at his namesake research firm. Yardeni
was describing the demand by investors in the 1980s for high yields to
compensate for the perceived risks of inflation and budget deficits.
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A trader works on the floor of the New York Stock Exchange in New
York, U.S., February 5, 2018. REUTERS/Brendan McDermid

All told, the jump in Treasury yields has yet to make its way into the broader
economy in the form of higher borrowing costs, yet it will likely start to
dampen the housing and auto markets as consumer loans become more expensive,
said Gary Cloud, a portfolio manager of the Hennessy Equity and Income Fund.
That, in turn, will make it less likely that the Fed raises rates more than
three times this year, he said.
"We're not haters of the bond market here at all. Treasuries look very cheap
compared to other income classes" such as high-yield credit or mortgage debt, he
said.
TECHNICAL SIGNS
Not all prominent bond fund managers are buying in. Billionaires Bill Gross and
Ray Dalio believe the bond market is at the beginning stages of a bear market.
Gundlach, the chief executive of DoubleLine Capital, told Reuters on Saturday
that it is "hard to love bonds at even 3 percent when GDPNow for Q1 2018 is
suggesting annualized nominal GDP growth above 7 percent," referring to a new
indicator of economic growth from the Atlanta Fed.
Meanwhile, benchmark 10-year note yields have broken above a long-term downtrend
in effect since the 1980s, which some technical strategists see as a bearish
indicator going forward. If yields continue to rise, it could further confirm
the breakdown of the more-than 30-year bull run.
Paul Ciana, a technical strategist at Bank of America Merrill Lynch, sees the
next major support level for 10-year notes at around 2.95 percent, the 150-month
simple moving average, which they last touched in 2007. A break above that could
lead the yields to next test 3.28 percent, the 200-month simple moving average,
which has not been reached since 1989.

Ciana sees a monthly close above 3.03 percent as technically confirming a
so-called double bottom, which is when yields retest a previous low and which
can signal a trend reversal. A close above that level could send the benchmark
yields "well into the mid-4 percent area," Ciana said in a report on Monday.
Richard Bernstein, chief executive of Richard Bernstein Advisors, said he would
be a buyer when the yield curve inverts.
The yield curve - the plot of all of the yields on Treasury securities of
maturities from four weeks to 30 years - is used as a signal of economic health
of the economy. An inverted curve, when short-term yields are higher than
long-term ones, has served as a classic precursor of economic recession.
"If you're a bond investor you'll lose much more sleep than equities," said
Bernstein.
(Reporting by David Randall; Additional reporting by Karen Brettell and Megan
Davies; Editing by Jennifer Ablan, Megan Davies and Leslie Adler)
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