Investors have withdrawn over $1bn from PIMCO's ultrashort US Treasury ETF, known as MINT, this month, indicating a growing demand for longer-duration investments [48592d9d]. The ETF has an effective maturity of 0.18 years and an estimated yield of 6.4% [48592d9d]. This move towards longer-duration investments is driven by concerns about cracks in the US economy, particularly in the consumer sector, as delinquencies in credit cards and auto loans are increasing [48592d9d].
The Federal Reserve's decision to stop raising interest rates in June has prompted investors to lock in duration at higher rates [48592d9d]. Despite the falling Consumer Price Index and the expectation of no further rate hikes, long-duration US Treasury ETFs have been boosted [48592d9d]. However, the yield curve remains inverted, with 10-year US Treasuries offering a lower yield than two-year notes [48592d9d]. The volatile environment has led to increased market volatility and uncertainty about future yield movements [48592d9d].
Despite the withdrawal from PIMCO's ultrashort US Treasury ETF, other investors, including major asset managers like Pimco, Janus Henderson, Vanguard, and BlackRock, are still seizing the opportunity to acquire US government bonds with longer maturities following a period of bond price volatility and rising yields [06b8a437]. These investors are betting that the pain in the Treasury market is nearly over and that a potential slowdown in the US economy may be on the horizon [06b8a437]. By adding duration to their portfolios, they are positioning themselves for a potential economic slowdown [06b8a437].
Vanguard, in particular, is optimistic about longer-dated Treasuries and expects interest rates to remain unchanged until at least mid-2024 [06b8a437]. Despite the challenging period for bond investors, Vanguard finds long-term bonds attractive due to the potential for high yields and capital appreciation in the event of an economic slowdown [06b8a437]. The asset manager's bullish stance on long-term US Treasuries reflects its confidence in the stability of the bond market [06b8a437].
This move by asset managers to snap up longer-dated bonds indicates their belief that the pain in the Treasury market is temporary and that the potential for higher yields and capital appreciation outweighs the risks [06b8a437]. They are positioning themselves for a potential economic slowdown, as they anticipate that interest rates will not be cut until at least mid-2024 [06b8a437]. By adding longer-dated bonds to their portfolios, asset managers are seeking to benefit from the stability of the bond market and the potential for higher returns in the event of an economic downturn [06b8a437].
Billionaire investor Stanley Druckenmiller recently criticized the US government for not issuing longer-term duration bonds when interest rates were historically low [31e934f4]. He argued that the Treasury should have taken advantage of the opportunity, despite concerns that banks lacking asset/liability management knowledge would have bought them [31e934f4]. Druckenmiller's comments sparked a debate among readers, with some agreeing and others disagreeing [31e934f4].
Pimco Sovereign Credit Analyst Nicola Mai believes there is still value in duration when it comes to Treasury yields [1d7b587b]. While he doesn't expect more interest rate cuts than what is already priced in the market, he sees potential in the overall yield curve [1d7b587b]. Mai made these comments during an interview with Bloomberg Television [1d7b587b].
Fund selectors are cutting duration on US Treasury bonds as the 'immaculate disinflation' narrative weakens [1185008e]. The risk of stronger-than-expected US inflation is a key driver behind this decision, with the latest figure rising to 3.4% in December 2023 [1185008e]. The rally in long-duration bonds late last year, following the Federal Reserve's dovish pivot, led to expectations of as many as 175 basis points (bps) worth of US interest rate cuts in 2024 [1185008e]. However, fund selectors are now eyeing the short end of the yield curve amid expectations that the Fed will be unable to cut rates in line with market forecasts [1185008e]. The latest US inflation reading and the resilience of the US economy have contributed to this shift in strategy [1185008e].
Alex Brandreth, CIO at Luna Investment Management, recently allocated to the iShares $ TIPS 0-5 UCITS ETF (TI5G) to lock in higher yields at the shorter end of the yield curve [1185008e]. Wei Li, global chief investment strategist at the BlackRock Investment Institute, also believes that the Fed will not be able to deliver the rate cuts currently forecasted by the market due to geopolitical fragmentation [1185008e]. Fund selectors have been forced to reduce their investment horizons and turn to ETFs for their nimbleness in this volatile environment [1185008e].
In summary, investors are capitalizing on the bond rout to acquire US government bonds with longer maturities [06b8a437]. They believe that the pain in the Treasury market is temporary and that a potential slowdown in the US economy may be on the horizon [06b8a437]. By adding duration to their portfolios, these investors are positioning themselves for potential capital appreciation and higher yields in the event of an economic downturn [06b8a437]. Vanguard, in particular, is optimistic about longer-dated Treasuries and expects interest rates to remain unchanged until at least mid-2024 [06b8a437]. This bullish stance reflects their confidence in the stability of the bond market [06b8a437]. Despite Druckenmiller's criticism of the US government's decision not to issue longer-term duration bonds, asset managers are confident in their strategy [31e934f4]. Pimco's Nicola Mai also sees value in duration when it comes to Treasury yields and believes in the potential of the overall yield curve [1d7b587b]. Fund selectors are now cutting duration on US Treasury bonds as the 'immaculate disinflation' narrative weakens [1185008e]. They are shifting their focus to the short end of the yield curve amid expectations that the Fed will be unable to cut rates in line with market forecasts [1185008e]. This shift is driven by the risk of stronger-than-expected US inflation and the resilience of the US economy [1185008e].