(Bloomberg) – Big investors in U.S. Treasuries are actively moving money into long-term bonds, betting that the unpopular asset class will be among the eventual winners of a rate cut.
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The 20 largest U.S. mutual fund managers have increased duration over the past two months as yields have risen, according to research from JPMorgan Chase & Co. To avoid negative carry, investors are building up their positions by “accumulating” in high-end corporate bonds. Nikolaos Panigirtzoglou, global market strategist at Financial Institutions, pointed to the increase in government debt.
Long-term corporate bonds are winning back investors who fled them as markets retreated from bets on imminent Federal Reserve stimulus. Its appeal is now returning as markets price in two interest rate cuts this year after data showed U.S. inflation has fallen for the first time in six months.
Gershon Distenfeld of AllianceBernstein Holding LP, who recently extended the duration of the $23 billion U.S. income portfolio he manages, said: “History has pretty consistently shown that yields start to rise sharply three to four months before the Fed actually starts cutting rates.” That “might not happen a month or two from now, six months from now, or even by 2025,” he said.
Bank of America strategists said in a note issued Friday that “non-bond trading” may have run its course and long-term debt is expected to recover in the second half of the year.
Fund managers have increased their allocations to fixed income by an average of 7 percentage points this month since April, but remain underweight overall, according to the Fund Managers survey. In contrast, cash levels have fallen to their lowest level in almost three years.
Corporate response
Some companies are responding to the demand for duration, with healthcare company Merck & Co. this week selling a 30-year bond, the longest-dated euro corporate bond since 2021. The advantage for companies is that interest rates will be longer. European debt is lower than short-term credit, allowing treasurers to keep borrowing costs low.
“Companies are taking advantage of the low credit spreads prevailing in the market and locking in that risk premium on their borrowings,” said Luca Bottiglione, head of European credit research at Zurich Insurance Group.
Thanks to the partnership with Merck, the average maturity of corporate bonds issued in the region's public syndicated bond market this month was about 7.6 years, the longest since October 2021, according to data compiled by Bloomberg. The data tracks sales of euros, pounds and dollars in the region and excludes perpetual and hybrid notes.
“Companies may be finding a sweet spot in the market right now,” said Althea Spinozzi, head of fixed income research at Saxo Bank AS. “While they can lock in the lowest yield on the yield curve, there are a significant number of investors willing to extend duration who want to speculate on aggressive rate cutting cycles.”
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move
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Fortress Investment Group has hired former Goldman Sachs Group managing director Michelle Dimitri. Dimitri will focus on private credit and will report to Andy Frank, head of global sponsor finance.
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Apollo Global Management has hired Chris Adair as managing director and fixed income specialist. Mr. Adair joins from his SLC Management position, where he was Managing Director and Head of Strategic Partnerships.
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Brinley Partners, a private credit firm with more than $4 billion in assets under management, has hired Rex Chung, most recently a partner at Hunter Point Capital.
–With assistance from Brian Smith, Cecile Gutscher, James Crombie, and Helene Durand.
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