Vanguard senior manager bullish on US Treasuries as Fed hikes near peak

Vanguard senior manager bullish on US Treasuries as Fed hikes near peak

By Davide Barbuscia

NEW YORK (Reuters) – Vanguard, the world’s second-largest asset manager, believes U.S. Treasuries are nearing the end of a painful decline even as prices fall to fresh multi-year lows, a senior portfolio manager at the firm told Reuters.

The 10-year US Treasury yield, which moves in opposition to prices, on Monday hit its highest level since 2011, continuing a trend that has put bonds in the midst of their worst year on record as the Federal Reserve rolls out hikes huge rates to cope with boom. inflation. Markets are widely expecting the central bank to raise rates by another 75 basis points on Wednesday after already delivering 225 basis points of tightening this year.

However, portfolio managers at Vanguard believe that Treasurys have already seen the worst of their declines and the Fed is likely to pull back on its monetary policy tightening if growth begins to slip sharply. The Malvern, Pennsylvania-based firm manages approximately $7.3 trillion in assets.

“The more aggressive the Fed goes, the closer it brings us to a hard landing situation. And we know what happens in a hard landing: there will be a quick pivot … and at that point clearly bonds start operating again,” said John Madziyire, senior portfolio manager and head of US Treasuries and TIPS at Vanguard Fixed Income Group.

He said Vanguard has been reducing exposure to lower-quality credits recently, amid more hawkish Fed expectations.

“If you’re standing for that, obviously you want to be tilted more defensively … And that means by definition you’re leaning more toward Treasury.”

Past rate hiking cycles have shown that yields reached their peaks before the last two feed increases, or three to six months before the cycle was over, Madziyire said.

“As long as … you have your cases in terms of the potential tail risks and you’re willing to hold that position in that tail risk, you know you’re going to be right at some point,” he said.

GRAPHIC: Fed funds and 10-year returns

Fed Chairman Jerome Powell said price pressures can be lowered without a sharp economic slowdown. He also stressed, however, that the central bank will be relentless in its fight to end inflation.

Expectations for the so-called terminal rate have shifted higher after US consumer price data showed inflation remained strong last month.

Fed funds futures traders expect interest rates to keep climbing to around 4.4% next March, more than 200 basis points higher than the current benchmark overnight interest rate. That compares to 3.8% earlier this month.

Madziyire emphasized that investors should be “willing to suffer a little loss,” since it will be difficult to time the Fed’s pivot accurately.

“Market timing is close to impossible … but what you try to do is try to figure out when you’re getting closer to the end and then position for that,” said he.

At the same time, the income earned from higher yields can also help offset losses if bond prices fall further than expected, he said.

“Even if 10-year yields go 10 basis points higher than what you would expect in the worst case scenario, relative to the amount of yield you’re picking you’re going to make your money back because the yields are so attractive ,” he said. .

(Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Nick Zieminski)

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