Economic resilience, fiscal concerns boost yields
Bond investors who had positioned portfolios defensively in anticipation of a U.S. recession are adjusting their strategies for a surprisingly resilient economy that will likely keep interest rates higher, longer than they had expected.
“The tail risk of a hard landing is being priced out, and that doesn’t mean we’re too bullish on the economy, but it does mean that the weighted average scenario has improved,” he said. Treasuries generally become more valuable, which means their yields decline, during periods of economic weakness, but long-term yields have spiked in recent weeks, with the benchmark 10-year hitting an almost 10-month high on Tuesday.
Danielle Poli, managing director and co-portfolio manager of the Oaktree Diversified Income Fund, told Reuters the company shifted allocations, with a view of higher rates for longer, for instance by investing more in floating-rate debt. However, Oaktree is now more selective in leveraged finance, a sector in which borrowers are more susceptible to higher borrowing costs.
“We have been tactically putting on yield curve steepeners in recent weeks but setting relatively tight risk limits on these trades given elevated levels of volatility,” Woodside said.With the bulk of the most aggressive monetary tightening in decades likely in the rear-view mirror, many on Wall Street are admitting they got their forecasts wrong.
Rising optimism around a soft-landing, however, comes with several caveats, making it difficult for investors to embrace the prevailing macroeconomic outlook with conviction.
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