A Goldman Sachs Group Inc. logo hangs on the ground of the Latest York Stock Exchange in Latest York, U.S., on Wednesday, May 19, 2010.
Daniel Acker | Bloomberg | Getty Images
Investors have piled into short-term U.S. government bonds in a bid to attend out the upheaval brought on by a blowout in longer-term yields, in line with a Goldman Sachs executive.
An auction this week of 52-week Treasury bills at a 5.19% rate was 3.2 times oversubscribed, its highest demand of the yr, said Lindsay Rosner, head of multi-sector investing at Goldman Sachs asset and wealth management.
“They’re saying, ‘I’m now being afforded so much more yield within the very front end of the curve in government paper’,” Rosner told CNBC in a phone interview, referring to 1-year T-bills. “That is actually where you are seeing investors flock.”
The trade is a key way that institutions and wealthy investors are adjusting to the surge in long-term rates of interest which have roiled markets these days. The ten-year Treasury yield has been climbing for weeks, reaching a 16-year high of 4.89% Friday after the September jobs report showed that employers were still hiring aggressively. Investors poured greater than $1 trillion into latest T-bills last quarter, in line with Bloomberg.
The playbook, in line with Rosner, takes advantage of the presumption that rates of interest might be higher for longer than markets had expected earlier this yr. If that sentiment holds true, longer-duration Treasuries just like the 10-year should offer higher yields next yr because the yield curve steepens, she said.
“You get to gather a 5% coupon for the following yr,” she said. “Then, in a yr, you will have opportunities [in longer-duration Treasuries] at greater than 5% in government securities or potentially in [corporate bonds] which can be now properly priced.
“You might then get a double-digit yield, but be confident about valuation, unlike now,” she added.
While 10-year Treasuries have crashed in recent weeks, other fixed income instruments including investment-grade and high-yield bonds have not fully reflected the change in rate assumptions, in line with Rosner. That makes them a nasty deal for the moment, but could create opportunities down the road.
The upheaval that is punished holders of longer-dated Treasuries in recent weeks has skilled managers reducing the typical duration of their portfolios, in line with Ben Emons, head of fixed income at NewEdge Wealth.Â
“Treasury bills are in high demand,” he said. “Anyone on the market who needs to administer duration of their portfolio, you do this with the 1-year T bill. That is what BlackRock is doing, it’s what I’m doing.”
