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Global bond sell-off persuades some investors to buy the dip
RECENT losses in Treasuries, which crescendoed on Thursday into one of the worst days since Donald Trump was elected president, look like a buying opportunity for many investors who have a grim view of the economy's prospects.
And it appears some are pouncing, with traders cashing out bearish wagers and buy-the-dip buyers rushing in. The rekindled interest in the safety of bonds nudged yields on the 10-year, which had climbed to a three-month high of 1.97 per cent on Thursday, down to 1.91 per cent on Friday in Asia.
Signs of progress in US-China trade talks have thrashed bonds for days, and the two countries agreed on Thursday to roll back tariffs on each other's goods if a trade deal is reached.
The Treasury market has seen a huge turnaround since August, when fears that global growth is slowing prompted the biggest monthly rally since 2008.
"Sentiment factors have shifted the needle quite quickly from, 'Oh, it's the end of the world' to 'Wow, there are no problems' and that's a massive overreaction," Aberdeen Asset Management's James Athey said in an interview this week with Bloomberg Television. The sell-off has "absolutely, without question" created a buying opportunity, particularly if the 10-year yield hits 2 per cent, he said.
The US is the most attractive government-bond market to own, given that the dollar remains the world's reserve currency and the Federal Reserve has the most room to cut rates before it gets to zero, "if you believe like I do that we're headed to a recession", Mr Athey said.
Money manager Raymond Lee at Kapstream Capital also expects the sell-off to be contained, saying that there's value in developed markets with positive bond yields such as the US. "I don't expect to see two or three years of rates backing up in a sustained way," he said in an interview in Singapore. "Yields may bounce around on headlines a bit, but inflation is still contained and rates are likely to stay low."
For some Treasury options traders, the sell-off was reason to scoop up profits on lucrative one-week bets that called the recent climb in yields.
The trades were struck last week when the 10-year yield was around 1.70 per cent and netted a profit of more than US$40 million as the level breached 1.90 per cent on Thursday.
Diminished appetite for government debt is pushing 10-year yield towards 2 per cent, a level it hasn't surpassed since Aug 1. It has also sent yields on French and Belgian 10-year securities above zero for the first time in months.
Some are suggesting the sell-off hasn't gone far enough. Bond valuations "still look rich", particularly in Europe where negative yields are pervasive, said Scott Thiel, chief fixed income strategist for BlackRock Investment Institute.
As they see it, trade policy wasn't the biggest factor behind broader worldwide weakness in the past 12 to 18 months. Instead, China is undergoing a secular shift in the pace and make up of its growth that leaves the country "less impactful" on the global economy. There's "really not much left in the engine of global economic growth at this stage", he said. BLOOMBERG