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Bond yields are trading at their lowest in over a year, and according to one trader, rates are headed even lower.
Fears that the world is risking a recession have sent investors flocking to the safety of government bonds.The yield on the U.S. Treasury 10-year note (^TNX), which often serves as a reference rate for other types of debt such as mortgages, traded as low as 1.716% on Tuesday morning. At the beginning of 2016, it was 2.3%. As bond prices rise, bond yields fall.Jack McIntyre, portfolio manager at Brandywine Investment Management, is bullish on U.S. Treasury bonds, in part because he doesn’t see inflation as a problem.
He also notes that U.S. 10-year yields are still higher than those of Germany and Japan, which are trading at 0.22% and 0.03%, respectively, on Monday.“The relative value in that limited universe makes Treasury yields still look very attractive,” he said.McIntyre also predicts that the Fed won’t likely raise rates this year and anticipates that Fed chair Janet Yellen will take a more dovish stance when she appears before Congress on Wednesday.
“I don't think the Fed wants to make a mistake or sound too hawkish,” he said. “Financial conditions have deteriorated; that's a tightening for the Fed. The U.S. dollar's been strong; that's a tightening for the Fed. So I suspect that the Fed is going to sound a little bit more dovish. They need to get some clarity on actual inflation, not just inflation expectations, before they start tightening again.”Interestingly, McIntyre is not as worried about China and oil, the two issues that have been cited as reasons global markets are now shaky.Recent data show China’s foreign exchange reserves at $3.23 trillion, a three-year low. A sizable portion of those reserves is made up of U.S. Treasury bonds.“There's a lot more capital flow into Treasuries, so it's not a big deal,” McIntyre said.He also finds the impact of plunging crude prices in 2016 to be overstated. “Everybody is fixated on oil,” McIntyre said. “They're looking at oil and kind of assuming it's a barometer for global growth … I think the weakness in oil isn't necessarily reflective of weaker demand. It's just that there's too much supply.”“To the degree that the financial markets continue to focus on that, I think that's presenting some longer-term opportunities to move some capital into some higher yielding parts of the bond market,” he added.
“I don't think the Fed wants to make a mistake or sound too hawkish,” he said. “Financial conditions have deteriorated; that's a tightening for the Fed. The U.S. dollar's been strong; that's a tightening for the Fed. So I suspect that the Fed is going to sound a little bit more dovish. They need to get some clarity on actual inflation, not just inflation expectations, before they start tightening again.”Interestingly, McIntyre is not as worried about China and oil, the two issues that have been cited as reasons global markets are now shaky.Recent data show China’s foreign exchange reserves at $3.23 trillion, a three-year low. A sizable portion of those reserves is made up of U.S. Treasury bonds.“There's a lot more capital flow into Treasuries, so it's not a big deal,” McIntyre said.He also finds the impact of plunging crude prices in 2016 to be overstated. “Everybody is fixated on oil,” McIntyre said. “They're looking at oil and kind of assuming it's a barometer for global growth … I think the weakness in oil isn't necessarily reflective of weaker demand. It's just that there's too much supply.”“To the degree that the financial markets continue to focus on that, I think that's presenting some longer-term opportunities to move some capital into some higher yielding parts of the bond market,” he added.
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