Convinced recession in the US was near, some of the world’s most prominent money managers loaded up on government bonds this year in a bold bet that would atone for Losses in the year 2022 will prove to be devastating.

The strategy now fails again. They are saddled with poor quality returns As the selling continues to intensify, investors are testing their resolve.

This week was particularly difficult. The annual return on US government bonds fell into the red as Treasury yields flirt with a 15-year high, reflecting the view that interest rates may be elevated for years to come — and the economy will be able to sustain it.

Bob Michele one of most outspoken bond bullsThe CIO is not deterred. The CIO for Fixed income, J.P. Morgan Asset Management correctly predicts the decline in Treasury yields “all the way down to zero” He now says that his strategy will be to purchase every dip below 2%. bond prices.

The firm’s flagship Global Bond Opportunities Fund is down Bloomberg’s data show that US stocks have risen 1.5% this month. They are also ahead of 35% peers in terms of performance so far for 2018. This is compared to 83% during the five previous years.

Others in the same camp — among them Allianz Global Investors, Abrdn Investments, Columbia Threadneedle Investments and DoubleLine Capital — believe the economy is only just starting to absorb the impact of five percentage points of Federal Reserve rate hikes. The yield curve is a reliable indicator of future inflation. recessionThis view is supported by.

“We don’t think this time it’s different,” said Michele. “But from that first rate hike until recession could take a while. We continue to see a growing list of indicators which are only at these levels if the US economy is already in recession or about to enter recession.”

You can hedge your bets by adjusting the duration of a contract, even though it may go against long-term goals.

Despite being a bond bull, Columbia Threadneedle’s Gene Tannuzzo has pared duration since July as the yield curve became more deeply inverted, shifting to shorter-dated Treasuries. The Strategic Income Fund he helps manage is up 2.8% this year, beating 82% of competitors, according to data compiled by Bloomberg.

“The best days in bonds are ahead of us” Tannuzzo noted that as the Fed nears the end its rate hike campaign.

Fund managers of Abrdn, and Allianz are overweighting duration. DoubleLine also increased allocations of long-dated securities in recent times. but offset It is a short-dated debt.

“We don’t think we’re going to be wrong,” said Mike Riddell, a portfolio manager at Allianz who’s been long duration since mid-2022. “We’ve remained long duration. We do not believe all the monetary tightening will not have any impact on growth.”

Rate hikes are more likely to lead to a slump in the economy than other historical patterns. Former Fed Vice Chair Alan Blinder studied 11 monetary policy tightenings from 1965 to 2022 and found that four ended in a soft landing with stable or lower inflation, and the rest in hard landings.

What will happen to yields? downAnother question arises. A key shift in the borrowing needs of the US and other wealthy economies means they’re prepared to let deficits balloons to fund ageing populations, defense spending and making good on promises to cut carbon emissions.

Investors will seek higher returns when faced with an influx of new debt.

Even so, riding a short-Treasury positions into 2023 wasn’t always a ticket to easy gains.

The Virtus AlphaSimplex mutual fund is traded under the ticker (ticker) ASFYX“” is down About 6% of the population is expected to increase this year. Although its short bond, long stock call looked well-positioned to benefit from the current environment, a big chunk of the drawdowns happened during the banking crisis in the first quarter, according to Kathryn Kaminski, AlphaSimplex Group’s chief research strategist and portfolio manager. She believes that the rates will continue to rise, which is why she has taken a short position.

“If inflation stays at about where we are now and rates are where we are then there’s no way that long-term cash flow – with no risk premium – can stay there,” Kaminski said. “If rates don’t go down fast enough, long term fixed income have to go down in value. That’s what the market is underestimating.”

For his part, JPMorgan’s Michele is confident bond The Fed will wind down and yields fall down The tightening of the cycle began well before the rate reduction.

“Whether the US economy enters recession or a soft landing, the bond market rallies after the last rate hike,” He said. “The Fed may keep rates at these levels for quite some time, but growth and inflationary pressure continue to slow.”

    — With assistance by Greg Ritchie and Isabelle Lee