Stephen H. Hooker, a Hartford. Conn.-based managing director and portfolio manager at multisector fixed-income shop Newfleet Asset Management LLC, cautioned that institutional investors are not likely to unload Treasuries during this period of high general market volatility, including volatility in interest rates, price and yield. However, he added, “We may see a small allocation shift, given our view of better relative value in investment-grade corporate bonds and municipal bonds, and higher return expectations for these sectors over the next year without taking on too much additional risk.”
Newfleet has about $10 billion in assets under management, all in fixed income.
In the current environment, Mr. Hooker said he also favors fixed-income assets that have a low-to-negative correlation to Treasuries, such as bank loans and corporate high-yield bonds. “We also favor short-duration assets in sectors such as non-agency residential mortgage securities and asset-backed securities,” he added.
For institutional investors seeking other fixed-income assets in addition to Treasuries, Anders Persson, the Charlotte, N.C.-based chief investment officer of global fixed income at Nuveen, said they might consider adding positions in sectors such as high-yield bonds, bank loans and preferred stocks, which produce more income while still providing lower volatility and downside protection.
Mr. Hooker said that while Fed policy continues to “become more hawkish in response to high inflation,” the Treasury curve has already priced in the equivalent of at least eight rate hikes of 25 basis points each in 2022, including the one announced last month. “So, over the six remaining Fed meetings in 2022, the Fed is expected to raise the Fed funds rate by 50 basis points at one or more of these meetings.”
But, he added, it is possible investors have already seen most of the weakness in Treasury prices if inflation starts to moderate over the remainder of this year.
Mr. Persson said he thinks the 10-year yield might reach 2.5% to 2.75% by year-end, thereby implying a “relatively modest move higher in yield from current levels and close to flat total returns.”
Mr. Persson also contends that inflation is “likely peaking right around now,” and assuming oil prices stay at current levels moving forward, he expects a total of 225 basis points of rate hikes by the Fed this year, including 50-basis-point moves at both the May and June meetings.
Even if this sell-off continues, Treasuries still have a place in institutional portfolios, Mr. Persson said.
“Treasuries historically have very low volatility,” he said, meaning that the variance of their returns is low. “(Treasuries) rarely rally by a large amount in a short time, but they rarely sell off by a large amount as well,” he explained. “Equities have much larger swings in both directions.”
Since 2000, Mr, Persson …….