Bond investors hoping to make money from eventual (although probably delayed) interest-rate cuts by the Federal Reserve might need to start looking beyond long-term Treasuries.
On Friday morning, the
was hovering around 4.3%, not far from its year-to-date high. Inflation is turning out to be like the annoying, unwanted house guest that doesn’t realize that they’ve long overstayed their welcome.
“Looking at the 10-year yield now and based on the inflation data that we continue to see, we could see even higher levels than today,” said Ed Egilinsky, managing director with Direxion, an exchange-traded-fund firm that has leveraged
and bearish long-term bond funds.
Bond yields and prices move inversely; so if Treasury yields decline from here—as some strategists have predicted—investors snapping the notes up now should eventually make a profit as their prices increase. But investors making that bet might be disappointed, as some market watchers see inflation staying put and Treasury yields heading even higher.
Interestingly though, Egilinsky said Direxion is seeing more inflows lately for its bull fund, a possible sign that investors are betting that the 10-year yield may not climb that much further.
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Others point out that the current economic backdrop is reminiscent of the early 1990s, a period of mostly solid economic growth. In this scenario, Treasury yields still have a lot of room to run upward, which would be bad news for bond bulls.
Nancy Tengler, CEO at Laffer Tengler Investments, noted in a report that the yield for the 10-year in the early 1990s hovered in the 5% to 7% range.
“The economy grew despite higher interest rates. Stocks rose,” she noted. But it was a bloodbath for bond investors.
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So what should fixed income fans do in the face of this daunting scenario? Riskier types of bonds, as well as dividend-paying stocks, could make more sense.
The
iShares Preferred & Income Securities ETF
is up nearly 3% this year. Junk bonds are holding up reasonably well too. The
SPDR Bloomberg High Yield Bond ETF
is flat. Meanwhile, the
iShares Core U.S. Aggregate Bond
and
iShares 20+ Year Treasury Bond
ETFs are down about 2% and 6% respectively.
“With intermediate credit, you can extend duration and prepare for a market where rates are eventually going to go down,” Tengler said. “You have to target your spots in fixed income.”
Write to Paul R. La Monica at paul.lamonica@barrons.com
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Read More: Treasury Bonds Are Slumping. Why Income Investors Should Look Elsewhere.
