Pressures from a higher-for-longer rates system The US downturn moves

Bond buyers who had set up their portfolios defensively in case the U.S. went into a recession are now changing their plans because the economy is holding up better than they thought it would, which will likely keep interest rates higher for longer than they thought.


In recent weeks, there has been more agreement on a so-called “soft landing” economic path, in which the Federal Reserve manages to stop inflation without causing output to fall. This has led some investors to take on more risk or bet less on safe assets like Treasuries going up.

Felipe Villarroel, a portfolio manager at TwentyFour Asset Management, which focuses on fixed income, said he was moving some of his investments from 10-year Treasuries to 10-year U.S. investment-grade corporate bonds. This reverses the increase in 10-year U.S. government bond positions that began a year ago when yields were going up because the Fed was raising interest rates.

“The tail risk of a hard landing is being priced out,” he said. “That doesn’t mean we’re too optimistic about the economy, but it does mean that the weighted average scenario has gotten better.”

For investors who thought the economy would get worse, it’s getting harder to stick to their predictions. Over the past year, the jobless rate has stubbornly stayed low, and growth has always been higher than expected.

John Madziyire, senior portfolio manager and head of U.S. Treasuries and TIPS at Vanguard Fixed Income Group, said, “It will take longer for rates to go up.” “Because of this, we’ve cut those positions, and we now expect them to happen a lot later than we thought they would.”

Usually, when the economy is weak, the value of Treasuries goes up, so their yields go down. However, long-term yields have been going up in recent weeks, and the standard 10-year yield hit a nearly 10-month high on Tuesday.

Bond investors are also taking into account the Bank of Japan’s recent change in its yield curve control policy, concerns about the U.S. debt’s ability to be paid back, as shown by Fitch’s downgrade of the U.S., and the large funding needs stated by the Treasury.

In a recent note, the credit investment company Oaktree Capital said, “Recession or no recession, we think the chances of higher interest rates for a longer time are much higher than the chances of cuts in the near term.”

Danielle Poli, who is the managing director and co-portfolio manager of the Oaktree Diversified Income Fund, told Reuters that the company changed its holdings because it expected interest rates to stay high for longer. For example, it bought more floating-rate debt. But Oaktree is now more picky about where it invests in leveraged finance, a field where borrowers are more likely to pay higher interest rates.

Anthony Woodside (OTC:WOPEY), head of U.S. Fixed Income Strategy at LGIMA, said that long-term worries about the U.S. budget have recently pushed up the prices on 30-year Treasury bonds by about 20 basis points.

He said that he thought term premiums, which are the payments investors want for keeping long-term bonds, would continue to go up.

“In the past few weeks, we’ve been putting on yield curve steepeners as a strategy, but we’ve put pretty tight risk limits on these trades because volatility has been high,” Woodside said.


With most of the most aggressive tightening of money in decades likely behind us, many on Wall Street are saying they were wrong about their predictions.

Stephen Dover (NYSE:DOV), chief market strategist at Franklin Templeton Investment Solutions, said, “I think the biggest mea culpa for me personally and, I think, for most of the market, is that I was wrong about interest rates being higher for longer and there not being a recession, which would be good for risk-on trades.”