AllianceBernstein joins bond bulls camp with 2.5% call on yields

THE time is ripe to buy Treasuries after a four-month sell-off, as the US central bank is close to signalling its hiking cycle is over and will ease next year, driving the benchmark yield as low as 2.5 per cent, said AllianceBernstein.

The money manager is not alone in calling for a turning point for US bonds, but its prediction is more aggressive than that of its peers such as Jupiter Asset Management. The Federal Reserve is likely to deliver at least four rate cuts, said AllianceBernstein’s Matthew Sheridan, who co-manages the American Income Portfolio fund which has gained almost 2 per cent this year to beat 75 per cent of its peers.

There has been no shortage of Treasury bulls, but the trade has proved to be a risky bet as 10-year yields surged about 100 basis points from an April low on signs that US rates may remain higher for longer. Market watchers are awaiting the Fed’s new dot-plot forecasts due on Wednesday (Sep 20) to get a handle on the policy outlook.

“The risk-reward to us looks attractive to own 10-year yields at today’s levels,” Sheridan said. “The real question is: How long is the Fed going to keep rates at these elevated levels? There are certain pockets in the US economy, they’re probably going to struggle if the Fed doesn’t cut rates next year.”

Investors who buy 10-year Treasuries now will reap a return of almost 20 per cent if yields drop as low as 2.5 per cent by the end of next year from around 4.3 per cent on Tuesday.

The US central bank is likely to start easing from as early as late first quarter 2024, and 10-year US yields will probably drop to between 2.5 per cent and 3 per cent next year, Sheridan said.

Fed fund futures are pricing in three to four 25-basis-point reductions in 2024.

AllianceBernstein, which oversees US$694 billion, joins a growing camp of bond bulls that have had their resolve tested. Just days ago, Invesco warned that the risk of a recession is increasing. Earlier, JPMorgan Asset Management and Allianz Global Investors said they were holding fast to the conviction that buying Treasuries would be a winning trade.

Meanwhile, Sheridan also favours other higher-quality liquid assets such as investment-grade bonds of large US lenders and notes issued by Europe’s top banks.

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“We think valuations are good; and if we get it wrong and inflation surprises to the upside, you’re probably going to get better to add more duration.” BLOOMBERG