U.S. Investors Shift To Long-term Treasuries

Expectations that a hawkish Federal Reserve will cause an economic slowdown are pushing investors to increase exposure to long-term Treasuries as policymakers say they are ready to ramp up their fight against inflation, Davide Barbuscia reported for Reuters.

Photo Insert: The Fed’s hawkish stance was underlined on Thursday when Fed Chairman Jerome Powell said a half-point interest rate increase "will be on the table" at the central bank’s monetary policy meeting next month.

Betting on the upside in Treasuries has been a risky proposition this year. Interest rates, which move inversely to Treasury prices, have galloped higher in 2022 as the central bank has grown progressively more hawkish, dealing the US government bond market its worst start to the year in history and gouging investors betting the selloff would abate.

Nascent Treasury bulls, however, believe that the meatier rate hikes and speedy balance sheet tightening the central bank has signaled will eventually slow US growth expectations and prevent Treasury yields from going much higher.

“We have been incrementally adding longer-duration bonds into our portfolios in anticipation of market participants pricing in slower growth moving forward,” said Gavin Stephens, director of portfolio management at Goelzer Investment Management.

The Fed’s hawkish stance was underlined on Thursday when Fed Chairman Jerome Powell said a half-point interest rate increase "will be on the table" at the central bank’s monetary policy meeting next month.

Investors are pricing in over 240 basis points of tightening for the rest of this year. Some economists have warned the Fed’s actions could make recession more likely by potentially pressuring spending or precipitating drops in stocks and other assets, hurting household wealth.

Stephens began adding longer-duration bonds weeks ago, after rates on two-year Treasuries briefly exceeded those on 10-year Treasuries. The phenomenon, known as an inverted yield curve, is viewed as a signal of economic worries and preceded past recessions.

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