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The 'Anything But Bonds' Trade Has Ended, According to Big Funds

May 19, 2024
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Major U.S. bond investors are increasingly shifting funds into long-dated bonds, betting that this often overlooked asset class will benefit from future interest rate cuts. The largest 20 mutual fund managers in the U.S. have extended the duration of their holdings over the past two months as yields have risen, according to JPMorgan Chase & Co. research. Investors have been moving into high-grade corporate bonds to avoid the negative returns associated with government debt, explained Nikolaos Panigirtzoglou, a global market strategist at JPMorgan.

Long-term corporate bonds are regaining favor with investors who had previously abandoned them when the market lowered expectations for immediate Federal Reserve rate cuts. The appeal of these bonds is increasing as markets now anticipate two rate cuts this year, following data indicating the first decrease in U.S. inflation in six months.

Gershon Distenfeld at AllianceBernstein Holding LP, who manages the $23 billion American Income Portfolio, noted that historically, yields begin to rally significantly three to four months before the Fed actually starts cutting rates. He suggested that this rally could begin “a month or two from now, six months from now, or not until 2025.”

Bank of America Corp. strategists remarked that the phase of avoiding bonds may be ending, predicting a resurgence for long-duration debt in the latter half of the year. A survey by the bank revealed that fund managers increased their bond allocations by an average of 7 percentage points in May compared to April, though they still hold fewer bonds overall than typically. Meanwhile, cash levels have dropped to their lowest in nearly three years.

Corporate ResponsesIn response to the growing demand for longer-duration bonds, some companies are issuing more long-term securities. This week, healthcare company Merck & Co. Inc. offered a 30-year security, the longest-dated euro corporate bond since 2021. This move benefits corporations by allowing them to secure lower borrowing costs, as rates on longer-term European debt are currently lower than those on short-term credit.

Luca Bottiglione, head of European credit research at Zurich Insurance Group AG, stated, "Companies are taking advantage of the low prevailing credit spreads in the market and locking in that risk premium for their borrowings." This strategy is evident as the average maturity of corporate bonds issued in the region’s publicly syndicated debt market this month has increased to about 7.6 years, the longest since October 2021, according to data. This data includes euro, pound, and dollar sales in the region but excludes perpetual and hybrid notes.

The strategic shift towards long-dated bonds highlights the broader market sentiment that anticipates eventual interest rate cuts, despite recent economic data and Federal Reserve signals. The renewed interest in these bonds suggests that investors are positioning themselves to benefit from potential rate cuts and are seeking stability in high-grade corporate bonds. This shift also reflects a cautious optimism that while the exact timing of rate cuts is uncertain, preparing for them now could yield significant returns when they occur.

In summary, the current bond market dynamics reflect a strategic repositioning by major investors, influenced by expectations of future interest rate cuts and recent economic indicators. Companies are responding by offering long-duration bonds, taking advantage of favorable credit spreads to lock in lower borrowing costs. This evolving landscape underscores the interplay between market expectations, economic data, and strategic investment decisions in the bond market.

Editorial Board
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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