Thirty-year US treasury yields touched 5.3% in August – their highest level since 2007. Even after the Treasury moved to calm the market by doubling its long-end bond buybacks, yields rebounded within hours.
As highlighted by market experts, this is a sign that pressures behind the move – from the growing pile of government debt to competition for capital from AI-related borrowing – aren’t going away any time soon.
Against this backdrop, Trustnet asked multi-asset and fixed income managers how they are positioning their bond portfolios.
Cutting duration of US treasuries
The long end of the curve is proving unpalatable, with many managers limiting their US treasury duration exposure.
Harvey Bradley, head of global rates investment at BNY Insight Investment, is cautious on the long end and instead overweight at the front end of the curve, while Ross Pamphilon, chief investment officer for fixed income at Impax Asset Management, has taken a similar view, keeping a “modest underweight”.
For Guillaume Rigeade, co-head of fixed income at Carmignac, the reluctance to invest in the long end comes down to an expectation that the US yield curve will steepen further, since the underlying fundamentals don’t look set to improve.
“There is a risk that the bond market starts testing [Treasury secretary Scott] Bessent’s ability to contain the rise in long-term yields as, when policymakers signal that certain yield levels are becoming uncomfortable, markets have a tendency to test their resolve,” Rigeade said.
That scepticism explains why his fixed income team hasn’t materially changed its bond positioning – already braced for higher long-term yields.
Meanwhile, James Ringer, global fixed income manager at Schroders, has been underweight US treasuries for much of the past year, based on the view that inflation would remain above target, fiscal policy would continue to support growth and a declining supply of workers would keep the US labour market relatively tight.
Yet his conviction has softened slightly.
“We are no longer outright bearish on US treasuries,” he said, having covered the underweight as valuations improved – though he still prefers to express positive duration views elsewhere, in markets such as Australia and Canada.
While Orbis Global Balanced and Orbis Global Cautious are also more focused on shorter duration opportunities across a range of developed market government bonds, Rob Perrone, the firm’s senior investment specialist, warned that this comes with its own considerations.
“If bonds are moving this way, they don’t counterbalance equities as well as they used to – they’re not the reliable ballast in a portfolio that they once were,” Perrone said.
He added that the two multi-asset Orbis funds do carry exposure to inflation-linked US bonds, which ties into the view that if the US tries to inflate its way out of debt and hold down yields it should provide good conditions for an inflation-linked bond.
For Rigeade, rather than owning US inflation-linked bonds outright, he prefers to isolate the inflation component through inflation swaps.
Looking beyond the US
Persistently elevated real yields in the US will reinforce the value of a diversified global fixed income approach, investment teams agreed, with many turning to other developed markets.
Australian government bonds stand out to Bradley, who predicts economic growth to soften into year-end, reducing the likelihood of further policy tightening and creating scope for bond yields to move lower.
Alongside Australian government bonds, Adam Marden, co-manager of T. Rowe Price Dynamic Global Bond, likes UK and New Zealand government bonds, arguing that “these markets offer more compelling duration opportunities than the US, including areas where the market appears to be pricing an overly aggressive path for future rate hikes or areas where central banks have already tightened”.
However, many developed markets face the same problem as the US, as they increasingly need to issue very large amounts of debt at a time when investors are becoming less willing to absorb duration without significantly higher compensation.
But not every developed market faces the same issue. Perrone pointed to Norway as a debt market he likes, explaining that the country has assets-to-GDP rather than debt, with bonds offering a reasonable yield with an attractive currency.
“Norway is also a resource exporter, so if bond yields rise because of inflation worries tied to oil prices, Norway should be okay,” he added.
Where emerging markets fit in
With confidence in developed market government bonds weakened, fixed income investors are considering pockets of value in the historically more volatile emerging markets.
Perrone pointed to Brazilian debt. “In Brazil you can get real [after-inflation] yields of 7–8%, versus close to 2-3% in the US, and that exerts its own gravity over time – real yields provide a strong incentive to save and a disincentive to borrow, spend and invest, which can weigh on economic activity and let yields and inflation come down,” he said.
There are also opportunities to be found in corporate debt across emerging markets, other investors agreed, with the asset class offering attractive yields relative to similarly rated developed market credit.
Bradley added: “This is while net issuance continues to decline, particularly in the high yield segment.”
A weaker dollar is expected to provide an additional tailwind, while higher commodity prices are also supportive for a number of emerging market economies.