US Treasury bonds updates
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Investors poured a record $3.2bn into funds investing in US inflation-linked bonds last week, adding to a deluge of cash this year which some analysts say is distorting signals from the government debt market.
The yield on 10-year inflation-protected US Treasuries, also known as Tips, has plumbed new depths this week, hitting an all-time low of minus 1.17 per cent on Friday. The collapse has come amid a global debt rally which has left investors searching for explanations.
While some worry that very low real yields — which measures the returns investors can expect once inflation is taken into account — are warning of a sharp slowdown in growth as the Delta coronavirus variant spreads, others have argued that market pricing has turned too pessimistic as the US economy continues its strong rebound. They have pointed to technical factors in markets to explain the rally, although this idea was rejected by Jay Powell, chair of the Federal Reserve, on Wednesday.
“Technical factors, which is where you put things that you can’t quite explain,” he quipped about the rally in government debt after the Federal Open Market Committee ended its latest meeting.
The relentless flows in Tips — a relatively small and illiquid asset class compared with the wider Treasury market — may be “distorting” the economic signal from real yields, according to Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
“Is the level of real yields telling us something worrying about the macro environment? I’m not so sure,” Ahmed said. “Given the size of the flows, I’m not sure you can take the economic signal at face value.”
The inflow recorded in the week to July 28 is the highest ever, according to analysts at Bank of America, representing 1.9 per cent of the total assets in Tips funds covered by fund tracker EPFR. Inflows so far this year total 16.6 per cent of assets under management in these funds.
Investors have also blamed quiet summer trading conditions and continued bond purchases by the Fed and other central banks for the rally. Those factors, along with inflows from investors, may be particularly pertinent for Tips, according to ING strategist Antoine Bouvet.
“The Tips market is just a less liquid market so it’s more liable to distortions,” he said, adding that a succession of very high inflation readings in the US is likely continuing to fuel demand for Tips.
“Inflation prints are up at around 4 or 5 per cent, and we don’t know how long it’s going to continue. It’s a risk that a lot of investors will want to hedge.”
Hefty inflows into inflation-linked bonds may also help explain why real yields are apparently flashing a warning signal about the economy at a time when other asset classes appear more upbeat, Ahmed said.
The S&P 500 index closed near its all-time high on Thursday. Gold, which typically benefits from low real rates and concerns about inflation, has fallen back to $1,828 a troy ounce, from its high for the year of $1,916 in May.
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