Bonds could soon become attractive again as investors worry about a possible recession after a sell-off that has hammered valuations, U.S. investment firm PIMCO said on Tuesday.
U.S. government bonds have had their worst start to the year in history as the Federal Reserve embarked on a path to tighten monetary conditions in response to unrelentingly high inflation.
Last week, the central bank hiked interest rates by 75 basis points – its biggest increase since 1994 – and anticipated that similarly supersized hikes were possible going forward.
Still, expectations that the Fed’s actions may weigh heavily on economic growth or even push the U.S. economy into a recession could soon bode well for bonds.
“There’s no guarantee that an end is in sight. But there are signs that, as in past steep market declines, the current losses are resetting valuations to levels that can prove attractive to investors who stay focused on the long term, with potential diversification benefits also improving,” said Marc Seidner, chief investment officer in non-traditional strategies at PIMCO.
A hawkish central bank increasingly determined to quell inflation has made a potential recession more likely. Goldman Sachs on Monday said it now sees a 30-per-cent chance of the U.S. economy tipping into a recession over the next year, up from its previous forecast of 15 per cent.
Government bonds are generally seen as a haven during periods of economic weakness, and a retrenchment in inflation – should the Fed’s efforts succeed in bringing it down – could create even better conditions for fixed-income investments, Mr. Seidner said in an article.
Benchmark 10-year Treasury yields – a barometer for mortgage rates and other financial instruments – have doubled this year. Yields move inversely to prices, so the surge in yield has caused heavy losses for investors.
“But it has also created a better starting point for new investments in terms of both potential income and diversification attributes – two of the bedrock reasons for owning bonds,” Mr. Seidner said.
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