Global asset management firms have recently been selling bonds and increasing their cash holdings. This comes as the previously declining U.S. Treasury yields have started to rise again this year. In the market, the expectation that the U.S. Federal Reserve (Fed) will delay the timing of interest rate cuts until after March is gaining traction. Domestic investors who had purchased U.S. long-term bond exchange-traded funds (ETFs) are also facing growing concerns.
On the 21st (local time), Bloomberg News reported, citing a Bank of America (BoA) survey of fund managers by global asset management firms, that bond allocations decreased by 17 percentage points compared to last month. During the same period, investments in cash instruments such as money market funds (MMFs) increased by 13 percentage points. This is a result of institutional investors increasingly expecting the Fed to postpone rate cuts and reduce the number of cuts this year.
Adam Darling, a high-yield bond fund manager at Jupiter Fund Management, which is increasing its cash allocation, said, "This month is one to sell risk on rallies rather than aggressively chase risk."
U.S. Treasury yields have rebounded this year. The yield on the 10-year U.S. Treasury bond, which briefly surpassed 5% last October for the first time in 17 years, closed last year at 3.860% amid expectations of a Fed pivot (policy shift). However, as of the 19th, the 10-year Treasury yield closed at 4.130%, and the 2-year Treasury, which is most sensitive to monetary policy, closed at 4.389%.
The rise in Treasury yields is due to hawkish remarks from global officials dampening expectations for rate cuts. On the 16th, Federal Reserve Governor Christopher Waller said that while rates would be cut this year, there was no need to rush, and on the 18th, Raphael Bostic of the Federal Reserve Bank of Atlanta forecasted that "it would be difficult to lower rates until the third quarter." Analysts also expect the number of rate cuts to naturally decrease.
When bond yields rise, prices fall. The ‘Direxion Daily 20+ Year Treasury Bull 3X Shares ETF’ (TMF), which tracks three times the yield of U.S. Treasury bonds with maturities over 20 years and is listed on the New York Stock Exchange, is one of the ETFs favored by individual investors in Korea. It is estimated that individual investors who recently purchased this bond product have incurred losses. According to the Korea Securities Depository, from the 1st to the 19th of this month, the net purchase settlement amount of TMF among overseas securities reached $17,812,703. TMF closed last year at $64.58 per share but traded at $54.89 on the 19th, down 15%. Even if bond yields fall again as the market expects, leveraged products may still incur losses due to the ‘negative compounding effect.’
Experts advise caution when chasing after the declining U.S. bond products. If the benchmark interest rate does not fall as much as expected or fears of a recession increase, the market could experience a sharper decline than now. Additionally, if attacks by the Houthi rebels on commercial ships passing through the Red Sea fuel inflation, it could become an obstacle for central banks worldwide to implement monetary easing policies.
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