NEW YORK, Feb 3 (Reuters) - The strong dollar, weak oil markets, a corporate-bond sell-off and stalling global economy are a toxic mess for most U.S. investors.
But these trends are delivering a welcome boost to the portfolios of conservative investors hunkered down in investments sensitive to U.S. Treasury yields.
Such investors have weathered years of predictions that the three-decade-long bull market in bonds was over, and that their positions were doomed should tighter monetary policy from the U.S. Federal Reserve lift rates.
The opposite has happened. Funds such as the $193 million Touchstone Total Return Bond, with stronger weighting to rate-sensitive U.S. agency debt and less exposure to corporate bonds, are winning.
“There are some structural forces out there that are keeping interest rates down and people are finally coming to realize it,” said Crit Thomas, a senior strategist for Touchstone Investments. The fund’s institutional shares returned 1.56 percent this year through Tuesday, according to Morningstar Inc, ahead of 90 percent of its competitors.
“It’s just taken a long time to get there,” Thomas said.
Yields on benchmark 10-year Treasury debt sank from nearly 2.28 percent at the year’s close to 1.88 on Wednesday afternoon, a 17 percent slide. Bond yields move inversely to their prices.
William Dudley, president of the Federal Reserve Bank of New York, said on Wednesday that financial conditions have tightened considerably in the weeks since the Fed raised rates. He added that policy makers will take that into consideration if the phenomenon persists.
Savvy fund investors anticipated the bond rally. They poured $9.5 billion into Treasury funds over the seven weeks that ended last Wednesday, according to Lipper.
The magnitude of the move shocked others.
“Clearly we’ve been surprised,” said Mark Cabana, a strategist for Bank of America Corp, which forecast 10-year yields ending 2016 at 2.65 percent. “Our rate call was below consensus at the beginning of the year so it seems that many in the industry have been surprised.”
Pessimists could be overstating the risks: Friday’s U.S. employment report could show the country’s labor market remains robust. But Treasury-hoarding bears, newly emboldened, say the move down is not over.
Mark Grant, a strategist at Hilltop Securities who correctly predicted the plunge in yields over the last two years, said the 10-year yield is headed for 1.75 percent.
Grant says oil prices are likely to drop further, a depressant for the energy sector, adding to the risk of a global recession.
Treasuries are being lifted by a rally born overseas. The Bank of Japan on Friday introduced negative rates in an effort to stimulate the country’s flagging economy.
That helped boost demand for U.S. bonds, which pay higher yields than Japanese and European sovereign debt. German and Japanese government bond yields are negative all the way out to the seven- and eight-year maturities. The 10-year German Bund currently yields 0.28 percent, less than the U.S. one-month bill.
Sixty-one percent of Treasury market moves in January happened outside normal U.S. trading hours, said Guy LeBas, strategist at Janney Montgomery Scott, “indication that much of the buying and selling is occurring overseas more than usual this year.”
Many U.S. investors missed that reality, said Bob Smith, president of Sage Advisory Services Ltd Co.
“Everybody was really focused on interest rates going up,” said Smith. “The thing that bit into everybody’s butts and tore a big chunk out was spread risk” as corporate bond prices reflected greater risk of default.
Terri Spath, chief investment officer at Sierra Investment Management, said her company began increasing holdings of 10-year Treasuries 10 days ago and plans to keep that position until it sees evidence oil or high-yield corporate bonds have stopped falling, or when markets no longer expect the Fed to keep raising interest rates.
“Investors are running for cover,” said Spath. “It’s no longer a stealth bear market in asset classes like oil and small cap stocks but an accelerating bear market.” (Reporting by Trevor Hunnicutt; additional reporting by Jennifer Ablan, Karen Brettell and David Randall; Editing by Tom Brown)