As Treasury yields rise, here’s how to allocate your portfolio, say the pros
The latest threat to stocks now isn’t macro risk — it’s rising 2-year Treasury yields, according to some fund managers and strategists. Short-term, relatively risk-free government bonds and mutual funds are back in the spotlight as the yield on the 2-year Treasury continues to rise. On Wednesday, it hit 4.1% – its highest level since 2007. As of Thursday in Asian hours, it pushed up to 4.1[ads1]24%. “The new headwind for stocks is not just from inflation, potential recession or even falling earnings estimates, but from the ‘competitive threat’ of rising interest rates making bond yields more attractive,” said John Petrides, portfolio manager at Tocqueville Asset Management. CNBC. “For the first time in a long time, the TINA (There Is No Alternative to stocks) market is no more. Short-term bond yields are now compelling,” he said. Michael Yoshikami, founder of Destination Wealth Management, agreed that bonds had become a “relatively compelling alternative” and could prove a “tipping point” for stocks. While Mike Wilson, Morgan Stanley’s chief US equity strategist, said bonds offer stability in today’s volatile markets. “While government bonds risk higher inflation [and the] The Fed is responding to that, and they still offer a safer investment than stocks, he told CNBC’s “Squawk Box Asia” on Wednesday. , given the data we’ve seen.” Data from BlackRock, the world’s largest asset manager, shows investors have been piling into short-term bond funds. Flows into short-term bond ETFs are at $8 billion so far this month — the biggest short-term bond inflows since May , BlackRock said Tuesday. Meanwhile, U.S.-listed short-term treasury ETFs have attracted $7 billion in inflows so far in September — six times the volume of inflows last month, BlackRock said. It comes as stocks have struggled, with S & P 500 down about 4% so far this month. How to allocate So should investors flee stocks and pile into bonds? Here’s what analysts say about how to allocate your portfolio right now. For Tocqueville Asset Management’s Petrides , the traditional 60/ 40 portfolio back. This sees investors putting 60% of their portfolio in stocks and 40% in bonds. “At current returns, the interest allocation of a portfolio can help contribute to expected returns and help those looking to get returns from their portfolio to meet cash flow distributions,” he said. Here’s a look at how Citi Global Wealth Investments has changed allocations, according to a Sept. 17 report: The bank removed short-term U.S. Treasuries from its largest underweight allocations, increasing its allocation to U.S. Treasuries overall. It also reduced its allocation to equities, but is still overweight dividend growth stocks. Citi added that 2-year Treasuries are not the only attractive option in bonds. “The same applies to high-quality, short-term spread products, such as municipal bonds and corporates, with many trading at taxable equivalent yields closer to 5%,” Citi said. “Right now, savers are also sending inflows to higher-yielding funds as returns eclipse the safest bank deposit rates.” Petrides added that investors should get out of private equity or alternative asset investments and shift their allocations to fixed income. “Private equity is also illiquid. In a market environment like this, and if the economy could continue on a recessionary path, clients might 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 were betting on another 50 basis point rise in the 10-year Treasury yield. This could send the S&P 500 to a new year-to-date low of 3,600, the investment bank said. The index closed at 3,789.93 on Wednesday. “If these materialize, we believe bearishness could become more extreme in the near term and the risk of a market overreaction will increase. We reiterate that we remain defensive in risk positioning and await more signs of capitulation,” Morgan Stanley analysts wrote . Rising interest rates also mean there is a risk that the economy will slow down next year, and long-term bonds could benefit, according to Morgan Stanley Investment Management portfolio manager Jim Caron. “Our capital allocation strategy has been a lever approach,” he said on . “On the one hand, we recommend owning assets with short duration and floating interest rates to manage the risk of rising interest rates. On the other hand, more traditional core rate and total return strategies with longer durations.” Examples of traditional fixed income include multi-sector investment-grade bonds, including corporates, Caron said. BlackRock also said it believes longer-term interest rates could rise, given the US Federal Reserve’s tightening is only just getting started. But for now, it urged caution on longer-dated bonds. “We urge patience as we believe we will see more attractive levels to enter longer duration positions over the next few months,” BlackRock said.
