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Read for 5 minutes Reuters, NEW YORK, July 8 – Despite the recent drop in Treasury yields, which they see as a temporary shift, investors at some of the largest U.S. asset managers are sticking to their belief that bond yields will rise in the second half of this year. Longer-dated U.S. government bond yields have been pushed lower by an unwinding of short bets against Treasury paper, as well as mounting concerns about the job market’s recovery and the spread of the Delta strain of the coronavirus. On Wednesday, the benchmark 10-year yield fell to 1.296 percent, while the 30-year yield fell to 1.918 percent, both at their lowest levels since February. However, major U.S. bond managers such as BlackRock, PIMCO, DoubleLine, and TCW continue to expect the recovering economy to drive growth and inflation, even if at a slower rate in the second half of this year, and to send yields higher once more. They attribute the larger decline in yields since mid-May, as well as the rapid decline on Tuesday and Wednesday, to investors unwinding an overbought bet on higher rates earlier in the year. “For a spell there in February and March, the outlook appeared pretty obvious,” said Gregory Whiteley, DoubleLine’s portfolio manager for US government securities. “Everyone was on board, everyone was short, and every strategist you spoke with was calling for higher rates by the end of the year.” “And it appears to have gotten a little ahead of itself,” he added. “Everyone was on the same side of the boat, with the same outlook, until doubts began to sneak in.” Bond rates, however, have “gone too far to the downside now,” according to Whiteley, “so we’ve overshot in the opposite direction.” According to other traders, the move this week was caused by hedge funds unwinding bets. Net negative bets against Treasuries fell to their lowest level since April, according to a weekly survey of JPMorgan clients released on July 6. “We haven’t modified our fundamental outlook as a result of the recent surge. This move appears to be more technical to us,” said TCW Treasury portfolio manager Bret Barker, who expects the 10-year yield at 1.6 percent to 2% by the end of the year. Fixed income experts predicted the 10-year yield will rise to 2.0 percent by June 2022, according to a June Reuters poll. In March, the so-called reflation trade, which involves betting on rising inflation and GDP, brought rates back to pre-pandemic levels. Longer-term yields, on the other hand, have fallen as inflation forecasts have decreased. Some growth forecasts have been lowered by the employment data for April, May, and June, which revealed a mixed picture of the labor market recovery in the United States. The service sector in the United States grew at a moderate pace in June, according to data released on Tuesday. “Right now, the reflation trade isn’t dead, but it’s clearly hibernating,” said Michael Sewell, portfolio manager at T. Rowe Price, who sees yields rising, despite the fact that he believes the 10-year yield peaked in March at 1.776 percent. Erin Browne, portfolio manager for multi-asset strategies at bond giant PIMCO, noted a “quite dramatic flattening” of the yield curve in recent months, owing to lower inflation breakeven rates since mid-May, when they hit multi-year highs. Since reaching a six-year high in March, the difference between two- and 10-year rates – the most prominent indicator of the yield curve – has decreased by more than 50 basis points. “All of this indicates that the market has reached its peak growth and inflation turning point.” And that really picked up yesterday and today,” Browne added. According to Browne, the move this week has pushed yields below fair value, with the 10-year yield expected to be 1.5 percent to 2% in the second half of 2021. Asset managers have been hunting for opportunities to profit from the changes. In its mid-year investment outlook released on Wednesday, BlackRock described current bond market valuations as “extremely full” and stated that it had become more pessimistic on US Treasuries. During the presentation, Scott Thiel, chief fixed income strategist at BlackRock, said, “We’ve exploited the opportunity of dropping yields to establish a shorter or more underweight duration position.” (Kate Duguid contributed reporting; David Randall contributed further reporting; Megan Davies and Leslie Adler edited)/nRead More

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