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U.S. Treasuries yields, which move inversely to prices, have
been rising fast this year as unrelenting inflation has fueled
expectations of interest rate hikes by the U.S. Federal Reserve.
Corporate bond spreads, or the interest rate premium that
investors demand to hold corporate debt over safer Treasuries,
have widened amid uncertainty over how aggressive the Fed will
be in tightening financial conditions.
But for Dave Plecha, global head of fixed income at Austin,
Texas-based Dimensional Fund Advisors, the shift of the U.S.
central bank toward less accommodative monetary policy has been
fully priced in.
"We are big believers in market prices, and the market is
setting a price on what they think the Fed is going to do, and
we accept that," he told Reuters in an interview.
Dimensional's investment strategy is based on the application of
the efficient market hypothesis, which posits that asset prices
reflect all the available information about expected returns. A
member of its board of directors is economist Eugene Fama, a
Nobel laureate whose research gave birth to quantitative
investing - an approach that relies on complex mathematical
models and algorithms based on historical data.
Plecha said shorter-dated U.S. government bonds are now expected
to provide better returns than long-dated ones, and he has
therefore in recent weeks increased exposure to Treasuries with
tenors of around three years.
"We have a systematic approach that says when curves are steep,
we're going to go out. ... There are decades worth of data that
show that on average, when yield curves are steep, you collect
higher average returns for being farther out than being
shorter," he said. "When curves are flat there is no evidence
that supports a higher expected return by moving out a flat
curve or an inverted, downwards yield curve."
The shape of the Treasury yield curve has been generally
flattening this year. A closely watched part of the curve
measuring the spread between yields on two- and 10-year Treasury
notes shows the gap at roughly 38 basis points, nearly 40 points
lower than where it ended 2021.
Dimensional has also increased exposure this year to corporate
debt with various risk profiles, despite corporate bonds having
dropped in price significantly year-to-date.
"When we see widening spreads, we're not running from that
market, we're heading towards it," Plecha said.
As spreads widened this year, Dimensional increased allocations
to single-A and triple-B credits, as well as, in some cases, to
riskier double-B-rated debt, he said.
"Some people say that feels a little contrarian, and I get that
comment because they're widening out because on average people
are reducing or getting out of credit. ... And we're saying,
this is now when we want to go in."
(Reporting by Davide Barbuscia; Editing by Leslie Adler)
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