As Treasury yields rise, here’s how to allocate your portfolio, pros say
The latest threat to equities isn’t macro risk now – it’s rising 2-year Treasury yields, according to some fund managers and strategists. Short-dated, relatively risk-free government bonds and funds are back in the spotlight as 2-year government bond yields continue to rise. On Wednesday it hit 4.1% – the highest level since 2007. On Thursday it rose to 4.124% during the Asian hours. “The new headwinds for equities stem not only from inflation, a possible recession or even falling earnings estimates, but also from the ‘competitive threat’ that rising interest rates are making bond yields more attractive,” John Petrides, portfolio manager at Tocqueville Asset Management, told CNBC. “For the first time in a long time, the TINA market (There Is No Alternative to Stocks) is gone. Yields on short-dated bonds are compelling now,” he said. Michael Yoshikami, founder of Destination Wealth Management, agreed that bonds have become a “relatively compelling alternative” and could prove to be a “tipping point” for stocks. While Mike Wilson, Morgan Stanley’s chief US equity strategist, said that bonds offer stability in today’s volatile markets. “While government bonds risk higher inflation [and the] They certainly still offer a safer investment than stocks as the Fed responds,” he told CNBC’s Squawk Box Asia on Wednesday. “To be honest, I’ve been surprised that we haven’t seen a major flight to that safety yet, given the data we’ve seen.” Data from BlackRock, the world’s largest wealth manager, shows that investors have invested in short-term bond funds. Inflows into short-term bond ETFs are $8 billion so far this month — the largest short-end bond inflows since May, BlackRock said on Tuesday. Meanwhile, US-listed short-term Treasury ETFs are up $7 billion so far in September on inflows – up six times last month’s inflow volume, BlackRock said stocks have struggled, the S&P 500 is down around 4% so far this month. So should investors flee stocks and dive into bonds? Here’s what analysts are saying about the current portfolio allocation. For Tocqueville Asset Management’s Petrides, the traditional 60/40 portfolio is back. Investors invest 60% of their portfolio in stocks and 40% in bonds. “At current yields, a portfolio’s fixed income allocation can help contribute to expected returns and help those looking to generate yield from their portfolio to meet a potential cash flow payout,” he said. Here’s a look at how Citi Global Wealth Investments shifted its allocations, according to a Sept. 17 report: The bank removed short-dated US Treasuries from its largest underweight allocation and increased its allocation to US Treasuries overall. The company also reduced its allocation to equities but remains overweight dividend growth stocks. Citi added that 2-year government bonds aren’t the only attractive option in bonds. “The same is true for high-quality, short-duration spread products, such as municipal bonds and corporate bonds, many of which trade at taxable equivalent yields closer to 5%,” Citi said. “Right now, savers are also sending inflows into money funds with higher yields as the yields eclipse the safest bank deposit rates.” Petrides added that investors should exit private equity or alternative investments and shift their allocations to fixed income. “Private equity is also illiquid. In a market environment like this and when the economy could continue on a recessionary path, customers may want more access to liquidity,” he said. What about long-term bonds? Morgan Stanley said in a Sept. 19 note that global macro hedge funds are betting on another 50 basis point rise in the 10-year Treasury yield. That could push the S&P 500 to a new yearly low of 3,600, the investment bank said. The index closed at 3,789.93 on Wednesday. “If these materialize, we believe the bear market could become more extreme in the short-term and the risk of the market overreacting will increase. We reiterate that we remain defensive on risk positioning and await further signs of capitulation,” Morgan Stanley analysts wrote. Rising interest rates also mean there’s a risk the economy will slow down next year, and long-duration bonds could benefit, according to Jim Caron, portfolio manager at Morgan Stanley Investment Management. “Our asset allocation strategy was a barbell approach,” he said on . “On the one hand, we recommend owning short-duration assets and floating-rate investments to manage the risk of rising interest rates. On the other hand, more traditional fixed income core and longer duration total return strategies.” Examples of traditional fixed income securities include cross-sector investment grade bonds, including corporate bonds, Caron said. BlackRock also said it believes longer rates could rise as the Federal Reserve’s tightening is “just beginning”. But for now, she urged caution with longer-dated bonds. “We ask for patience as we believe we will see more attractive levels to enter into longer duration positions over the next few months,” BlackRock said.