Analysis - Higher rate regime for longer period pushes for US recessionary trades
NEW YORK (Reuters) - Bond investors who positioned portfolios defensively in anticipation of a U.S. recession are adjusting their strategies for a surprisingly resilient economy that is likely to keep interest rates higher for longer than they expected.
The so-called soft-landing economic path — in which the Federal Reserve manages to curb inflation without causing output to fall — has gained more traction in recent weeks, prompting some investors to take on more risk or reduce bets on hedge assets such as how the treasury would collect.
Felipe Villarroel, a portfolio manager at TwentyFour Asset Management, which specializes in fixed income, said it was shifting some allocations from 10-year Treasuries to 10-year investment-grade U.S. corporate bonds. That reversed a build-up in 10-year U.S. Treasuries that began a year ago when yields rose on the back of the Fed's rate hikes."The tail risk of a hard landing is being appreciated, and that doesn't mean we're too bullish on the economy, but it does mean the weighted average scenario has improved," he said.
For investors who expected more economic strife, compliance is becoming increasingly difficult. Over the past year, the unemployment rate has remained defiantly low and growth has been consistently above trend.
"It will take longer for rates to recover," said John Madziyire, senior portfolio manager and head of the U.S. Treasuries and TIPS in the Vanguard Fixed Income Group. "As a result, we have reduced these positions and expect them to occur much later than we previously anticipated."
Treasury bills generally become more valuable, meaning their yields fall during periods of economic weakness, but long-term yields have risen in recent weeks, with the 10-year benchmark hitting a near 10-month high on Tuesday.
In addition to pricing in greater economic resilience, bond investors are also factoring in the Bank of Japan's recent shift in its yield curve control policy, issues surrounding US debt sustainability as highlighted by Fitch's downgrade in the US, and large funding requirements announced by the Treasury Department."Recession or no recession, we think the likelihood of higher and longer interest rates is far greater than the likelihood of a near-term cut," credit investment firm Oaktree Capital said in a recent report.
Danielle Poli, managing director and co-portfolio manager of the Oaktree Diversified Income Fund, told Reuters the firm had shifted allocations with a view to higher rates for a longer period, for example by investing more in floating-rate debt. However, Oaktree is now more selective in leveraged finance, a sector where borrowers are more prone to higher borrowing costs.Longer-term concerns about the U.S. fiscal position pushed 30-year Treasury yields up 20 basis points recently, said Anthony Woodside, head of U.S. fixed income strategy at LGIMA.
He said he expects term premiums, or compensation that investors demand for holding long-dated bonds, to continue to rise."We have tactically introduced steeper yield curves in recent weeks, but given the increased volatility we have set relatively tight risk limits on these trades," Woodside said.
LOW CONVICTION
With most of the most aggressive monetary tightening in recent decades likely in the rearview mirror, many on Wall Street are admitting they got their forecasts wrong.
“I think the biggest mea culpa for me personally, but I also think across the whole market, it's wrong that interest rates could be higher for longer and we couldn't have a recession, which would be positive for risk. deals," said Stephen Dover, chief market strategist at Franklin Templeton Investment Solutions.
So-called risk assets such as stocks and high-yield corporate bonds, which tend to underperform during economic downturns, have emerged strongly from last year's slump, while safer bets such as U.S. Treasuries have lagged.However, the growing optimism surrounding the soft landing comes with several caveats, making it difficult for investors to take the prevailing macroeconomic outlook with conviction.
A re-acceleration of inflation could lead to higher rates than those set by the market. This would increase the chances of a sharper economic slowdown. Meanwhile, the delay in the full impact of the Fed's rate hikes may unnerve investors.Some avoid uncertainty by combining exposure to short-term, higher-yielding bonds and long-term bonds in the event of a downturn.
Chip Hughey, managing director of fixed income at Truist Advisory Services, said he recommends a "barbell structure" that backs short-term securities with long-dated bonds "should we move into a period of higher risk."
For Madziyire's team at Vanguard, this has meant that business has shrunk."There is leeway for portfolio managers to fill the position within a certain tolerance, but it won't be a big deal," he said. "It's because there's no consensus on where we're going."
In the ever-evolving environment of the global economy, the emergence of a regime of "higher for longer" rates has sparked intense discussion in the financial field. This phenomenon has significant implications for various sectors, including American businesses in recession. In this article, we delve into an analysis of the longer-term higher rate regime and its potential effects on business during an economic downturn. We will also explore the relative keywords associated with this essential topic.
Understanding the higher mode for longer rates:
The term "higher-for-longer" refers to a scenario where central banks decide to keep interest rates at elevated levels for an extended period of time. This strategic move is often prompted by a desire to curb inflation, stabilize the economy, or prevent certain sectors from overheating. Interest rate decisions by central banks have a ripple effect on various financial instruments, investments and trading strategies.
Bond markets and yield curves:
One of the most obvious effects of a longer-term higher rate regime is on bond markets. When interest rates remain elevated, bond yields tend to rise, leading to lower bond prices. Investors can reassess their portfolios and move from traditional bonds to other assets offering higher returns. The yield curve, a graphical representation of bond yields across different maturities, can flatten or even invert under such circumstances, potentially signaling an impending economic recession.
Stock Markets and Defensive Stocks:
In times of economic uncertainty, investors often turn to defensive stocks—those in sectors that are less susceptible to economic downturns. Sectors such as utilities, healthcare and consumer staples tend to outperform during recessionary periods. However, a regime of higher rates over a longer period could affect the performance of these sectors as their returns may become less attractive compared to fixed income investments.
Currency and Commodities:
The higher interest rates associated with the regime can strengthen the domestic currency, making exports more expensive and potentially affecting trade balances. In addition, commodities that are denominated in US dollars may experience price fluctuations due to currency movements. Investors may find themselves reassessing their exposure to commodities during such periods.
Relatives associated with a regime of higher or longer rates:
Long-term interest rates: The scheme focuses on increased rates over a longer period of time.Central Bank Policy: Refers to decisions and actions taken by central banks to influence economic factors.Impact of monetary policy: The effect of central bank action on economic variables.
Yield curve dynamics: Analysis of shifts and changes in the shape of the yield curve over time.Defensive Stock Strategy: An investment approach aimed at minimizing risk during market downturns.
Currency Depreciation/Appreciation: The effect of higher rates on the value of a national currency.Commodity Price Fluctuations: Changes in the cost of raw materials and goods.Recession Indicators: Signs Pointing to an Economic Recession.
The concept of a regime of higher rates over longer periods carries considerable weight in the world of finance and economics. As central banks manage their policies to maintain economic stability, various trades and investment strategies are affected. Understanding the potential impact on sectors such as bonds, stocks, currencies and commodities is essential for investors looking to weather the storms of economic uncertainty. By monitoring the relative keywords and indicators associated with this regime, market participants can make informed decisions that are consistent with the ever-evolving financial environment.
.jpg)
0 Comments