The Easy Money Has Already Been Made in Bonds

Asset managers, worried that the end-of-year rally on expectations of a soft landing was overly optimistic, are selling bonds and boosting their cash holdings.

Bond allocations among fund overseers have tumbled 17 percentage points since the same time last month, according to a Bank of America Corp. fund manager survey published this week. The amount of money they parked in money market funds and other cash vehicles rose 13 percentage points in the same period.

Taking profits in bonds makes sense now. Because short-term rates are so high relative to intermediate- and longer-term yields, a junk bond doesn’t pay that much more yield than a Treasury bill. And monetary officials caution that markets have grown too confident that rate cuts are coming soon. Traders are broadly tempering bets on the number of interest rate cuts by central banks this year.

“This is a month to sell risk into a rally rather than aggressively chase risk,” said Adam Darling, a high-yield bond fund manager at Jupiter Fund Management Plc, who is among those increasing his allocation to cash. “If data indicates anything other than a soft landing there will be a lot of panic in the market.”

For managers like Darling, it’s becoming harder to justify holding bonds that can slump if rates fail to fall as much as expected or if fears of a recession start to intensify. Geopolitical tensions, including attacks by Houthi militants on commercial vessels in the Red Sea, could cause inflation to start to tick back up again, complicating the outlook for monetary easing.

Rates traders are currently pricing in more than five 25-basis-point cuts this year in the euro region and the US, and more than four by the Bank of England, according to data compiled by Bloomberg.

Easing is likely in the summer, European Central Bank President Christine Lagarde said this week, while cautioning that the aggressive bets are “not helping our fight against inflation.”

Allspring Global Investments is among the money managers that still see an opportunity in bonds because yields are high enough to compensate for inflation, said Henrietta Pacquement, head of global fixed income and sustainability at the firm. But there could still be pressure on the debt this year, she said.

“We would be amazed if we didn’t have at least one spread selloff this year,” said Jupiter’s Darling. “The economic environment is so volatile that we could have a selloff on even a small piece of bad news.”

Source from: Bloomberg