Warm bond investors to risk, with Fed remaining in the ‘Goldilocks’ economy
Bond investors add portfolio risk after a long time to be careful, seeing the US economy in the moment of “Goldilocks”, not too hot or too cold, because they bet Federal Reserve will leave an unchanged interest rate for the fifth policy meeting in a row.
Investors buy more corporate bonds and add a little more duration to their portfolio, showing that they are more comfortable going further than the curve.
The Open Market Committee for the installation of US central bank policies is widely expected to maintain the interest rate overnight in the range of 4.25% -4.50% when the two -day meeting ends on Wednesday. Standing Pat has been a default attitude since December, given a very strong economy who has seen a fairly stable labor market and generally calm inflation.
“Our system says that economic growth seems quite strong, although we can argue that it is in the edge,” said Jeff Young, head of an investment strategy, at PGIM Solutions quantitative in New Jersey.
“We have seen several prices beating, but it is not always a general inflation as a whole. This is a price increase once on certain items and it allows Fed to maintain the waiting posture and see this.”
Futures track the Fed’s policy level show around 65% of opportunities that the central bank will provide a tariff reduction in September, with other possibilities at the October or December meeting. All said, the futures level on Monday implies around 44 basis points (BPS) easing in 2025, or only under two decreased levels of 25 bps respectively.
The Fed reduced interest rates three times in 2024 before stopping the easing cycle earlier this year.
The waiting-and-seeing approach to the US central bank is a signal for bond investors to rise back to risk taking, the analysts said.
“We are a credit risk that is overweight in our portfolio, getting the risk of returning that we sell or delete in March and the beginning of April given the uncertainty and strict assessment at that time in the economy,” said Vishal Khanduja, Head of the Broad Market’s Fixed Income at Morgan Stanley Investment Management in Boston.
“Growth slows down, but does not slow down to the level of recession. So this almost makes it a very ‘goldilocks’ environment for fixed income, especially credit where you do not see the fear of recession and balance sheet is very strong, both consumers and companies.”
Faded concerns
Signs of anxiety easing have existed in the bond market in the last few weeks.
JP Morgan said in his latest treasury survey last week that the percentage of all clients with a long duration relative to their benchmarks had increased to 30% from 26% the previous week. Adding duration can reflect optimism that interest rates will fall.
It is stated in the number of years, the duration is related to how far the bond value will go down or rise when the interest rate moves. In general, when the level drops, higher bonds experience a greater increase in value than those who have a lower duration.
In the credit market, Spreads to Treaduries have also narrowed since blowing up the week after the announcement of the “Liberation Day” of President Donald Trump April 2 which panicked with the prospect of a trade war that could worsen inflationary pressure.
The spread of investment level bonds established at 78 basis points (BPS) last Friday, the most stringent since mid -November last year, and 1 BP was ashamed from the lowest point of 77 BPS in 1998, according to ICE Baml data. It has touched 121 bps, or the highest since November 2023, on days after the day of liberation.
The distribution of high yields also showed the same recovery, showing 284 bps last Friday, down from 461 bps a week after the release day.
A narrower distribution shows that bond investors demand fewer additional results to hold more risky corporate bonds over safer US treasury and reflect self -confidence in the US economy and company health.
Bond volatility is also low, shows a stable economic environment for fixed income investors. On last Friday, the Bofa Ice move index was step 82.09, the lowest two weeks.
“We run our portfolio at a lower level of risk than our long-term average,” said and Siluk, the head of the short duration and global liquidity in Janus Henderson Investors, but he clarified that caution remains because the company has maintained a shorter duration.
“We have more Triple BS (Corporate Bonds with three-ranked), we have high results in the portfolio, but instead of having three years, I will have one year, he added.” And that means I turned more portfolios, but I looked for good opportunities.
Other bond investors are also careful, but look for relative value.
“The quality of the portfolio is the highest ever given all uncertainty. So we are more defensive. But we are still mobilizing cash and we are looking for relative value opportunities,” said David Norris, partner at Twentyfour Asset Management.
“We think the market is very foamy considering the action in spread.”
Source: Reuters
