Analysis – Big U.S. Bond Managers Avoid Long-Term Government Debt | WTAQ News Talk

By Davide Barbuscia

NEW YORK (Reuters) – Many U.S. bond managers at firms managing trillions of dollars in assets are avoiding long-term U.S. government bonds as they expect fiscal concerns could cause periodic volatility.

Long-term U.S. Treasury yields, which move inversely with prices, briefly rose on inflation and fiscal concerns following U.S. President Biden’s disastrous televised debate last month and the failed assassination attempt on former President Donald Trump last weekend, which raised expectations that Trump could reclaim the White House.

Bond investors sold long-term Treasuries as they worried about Trump’s trade and economic policies, which could increase inflation and the U.S. debt level over time. Trump’s team has said his pro-growth policies will lower interest rates and reduce deficits. Many market participants believe deficits will continue to worsen in a second Biden administration.

Although yields have since fallen on signs of a weakening economy, several bond managers at the country’s largest asset managers predict that longer-term Treasury bonds will remain vulnerable to price declines as the government deficit is likely to widen due to higher spending, including to pay interest on the debt.

Bond fund managers are cautious about increasing exposure to longer maturities, although they remain bullish on the asset class because the Federal Reserve’s rate cuts are likely to boost prices of shorter- and intermediate-term government bonds, which more directly reflect changes in monetary policy.

“Interest rate volatility is likely to remain elevated as a result of fiscal and other factors. … I think a lot of that is a function of that uncertainty around debt supply and the deficit,” said Chitrang Purani, fixed-income portfolio manager at Capital Group, which manages more than $2 trillion in assets.

As he said in an interview, Purani is “underweight” Treasury bonds with maturities of 10 years and longer in his portfolio, meaning he buys fewer of them while offsetting that position with an overweight in intermediate-term bonds.

Other market participants have similar views.

Sara Devereux, global head of fixed income at Vanguard, which has more than $9 trillion in assets under management, said she was bracing for “continuous periods” of rising fiscal debt premiums, referring to the extra compensation investors need for the risk of holding long-term debt that could fall in value if emissions rise.

These episodes could be an opportunity to buy longer-term bonds cheaply, she said during a webinar this week. “But we really prefer the middle of the yield curve, not going all the way to the 30-year point where some of that term premium is a little bit difficult now,” she added.

Asset managers’ long positions in two-year Treasury futures hit a record high this month, data from the Commodity Futures Trading Commission showed. By contrast, their bullish bets on the 10-year Treasury futures are down about 10% year over year.

Investment strategists at BlackRock, the world’s largest asset manager with $10.65 trillion in assets under management, also recently expressed a bearish view on longer-term Treasury bonds, as investors are likely to demand a higher reward to hold them due to increased supply.

The Federal Reserve Bank of New York’s gauge of the premium investors demand for holding long-term government bonds turned positive again on July 1, days after Biden and Trump’s televised debate. It was only the third such finding this year.

The Fed is expected to start cutting rates as early as September as economic activity and inflation cool on higher borrowing costs. But there is no end in sight to the larger deficits.

The nonpartisan Congressional Budget Office last month raised its cumulative deficit forecast for fiscal years 2025-34 to $22.083 trillion, up $2.067 trillion from February. The federal national debt could rise to nearly $48 trillion by 2034 from $26 trillion earlier this year, it said.

The next quarterly U.S. Treasury bond refund amount is scheduled to be announced on July 29.

“There’s economics, there’s supply, and there’s politics, and supply and politics are closely linked,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, which manages more than $800 billion in assets.

“It’s a good strategic point for fixed income because you’ve already passed the point of interest rate increases in the cycle,” Tipp said. “But it’s not going to be a quick bull market with a big drop in long-term rates.”

(Reporting by Davide Barbuscia; editing by Megan Davies and Richard Chang)