Summit News

U.S. bond yields to rise but don't bet on bull run ending, M&G's 'bond vigilante' says

LONDON (Reuters) - U.S. Treasury yields should rise from current levels but any major selloff is unlikely in a bond market that has been locked in a three-decade bull run, the CIO of public fixed income at M&G Investments said on Wednesday.

Speaking to the Reuters Global Investment Outlook Summit, Jim Leaviss, who runs the widely read Bond Vigilantes blog, said he was “short duration”, even though he does not anticipate as a big a jump in U.S. bond yields as markets are pricing.

“We are short duration at the moment, which implies that I expect bond yields to rise from here,” Leaviss said.

“But I don’t expect this to be a one-way rise in yields... you have to be pretty sure of yourself if you think a 30-year trend (in bonds) is coming to an end.”

U.S. 10-year Treasury yields rose to three-week highs around 0.96% on Wednesday and jumped 9 basis points on Tuesday, dented by the new push in Congress to send federal aid to businesses and states hit by the coronavirus pandemic.

Leaviss recommended increasing exposure to U.S. inflation protection given the very low levels of real yields - bond yields when adjusted for inflation.

Real yields across the developed world have collapsed this year as the coronavirus shock led to a downgrade of not just economic growth expectations, but inflation as well.

Still, U.S. stimulus headlines on Wednesday lifted the 10-year breakeven inflation rate to 1.84% - its highest level since May 2019. Thirty-year breakevens are around 1.95%.

(Graphic: U.S. TIPS breakeven inflation rates )

“You can buy insurance against inflation at a level below the inflation target and for me that looks like not a bad thing to be looking at, even though I’m not an inflationist,” said Leaviss, referring to 30-year breakevens.

“I think over a 30-year period, you’ve got to suspect that those risks exist.”

Speaking about currencies, Leaviss said that while M&G had a big underweight position in the U.S. dollar, he believed the greenback was getting to the end of its weakening phase.

The euro, meanwhile, is approaching levels that could concern the European Central Bank.

“At about $1.21, that’s going to start doing damage to the eurozone economy and so as a result, I think we can expect more easing from the ECB and other places that have been on the receiving end of the weakening dollar effectively,” Leaviss said.

Leaviss also said:

* there is a “valuation” opportunity in emerging markets

* efforts to boost the euro zone economy have strengthened investment prospects for the bloc

* he does not expect the Bank of England to adopt negative interest rates, and expects the fiscal response to be probably “more powerful”

* default rates are likely to stay low. Sees “zombification” of companies as the bigger risk.

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Additional reporting by Sujata Rao and Tommy Wilkes; Editing by Dan Grebler