Top manager Vanguard bullish on US Treasuries as Fed hikes near top

Vanguard’s logo is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 1, 2022. REUTERS/Brendan McDermid

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NEW YORK, Sept 19 (Reuters) – Vanguard, the world’s second-largest asset manager, believes U.S. Treasuries are near the end of a painful decline even as prices tumble to new multi-stage lows. years, a senior portfolio manager at the company told Reuters. .

Benchmark 10-year U.S. Treasury yields, which move inversely to prices, hit their highest level since 2011 on Monday, continuing a trend that put bonds in the midst of their worst year as the Federal Reserve rolls out massive rate hikes to fight soaring inflation. Markets broadly expect the central bank to hike rates another 75 basis points on Wednesday after already tightening 225 basis points this year. Read more

Vanguard portfolio managers, however, believe that Treasuries have already seen the worst of their declines and that the Fed is likely to reverse monetary policy tightening if growth begins to fall sharply. The Malvern, Pennsylvania-based company manages approximately $7.3 trillion in assets.

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“The more aggressive the Fed is, the closer we get to a hard landing scenario. And we know what happens in a hard landing: there’s going to be a quick pivot…and then , bonds will clearly start to perform again,” said John Madziyire, senior portfolio manager and head of US Treasuries and TIPS at Vanguard Fixed Income Group.

He said Vanguard had recently reduced its exposure to lower quality credits, amid expectations of a more hawkish Fed.

“If you’re positioning yourself for that, obviously you want to be more defensively inclined…And that by definition means you’re leaning more towards Treasuries.”

Past rate hike cycles have shown yields peaked before the Fed’s last two hikes, three to six months before the end of the cycle, Madziyire said.

“As long as…you have your scenarios of potential tail risks and you’re willing to hold that position in that tail risk, you know you’ll be right at some point,” he said.


Fed Chairman Jerome Powell said price pressure could be eased without a sharp economic downturn. He also stressed, however, that the central bank will be relentless in its fight to stamp out inflation. Read more

Expectations for the so-called terminal rate rose after US consumer price data showed inflation remained robust last month.

Fed funds futures traders expect interest rates to continue to climb to a high of around 4.4% next March, more than 200 basis points higher than the rate day-to-day interest rate. That compared to 3.8% earlier this month.

Madziyire stressed that investors “should be prepared to take a small loss” as it will be difficult to accurately plan the Fed’s pivot.

“It’s almost impossible to time the market…but what you’re trying to do is try to figure out when you’re getting close to the end and then position yourself for that,” he said.

At the same time, income from higher yields can also help cushion losses if bond prices fall more than expected, he said.

“Even if the 10-year yields go up 10 basis points from what you would expect in the worst case scenario, relative to the amount of yield you’re getting, you’re going to get your money back because the yields are so attractive “, did he declare. .

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Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Nick Zieminski

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