Guggenheim Treasury Bulls Send More Of $240 Billion To Long End

Treasury yields near record lows have even more room to fall amid steady Federal Reserve policy and a likely increase in market volatility this quarter, according to Guggenheim Partners.

U.S. debt will continue attracting foreign investors who face  negative yields in their own countries, and with the Fed unlikely to raise interest rates before December, those buyers won’t be deterred, the $240 billion firm wrote in a report Wednesday. Accordingly, Guggenheim is favoring long-dated Treasuries and strips, the zero-coupon government securities that constitute the ultimate bullish bet on bonds, since they pay nothing until maturity.

“With extremely low and negative bond yields outside of the United States, we believe that U.S. rates will remain relatively attractive,” Guggenheim’s interest rates team, led by senior managing director Connie Fischer in Santa Monica, Calif., wrote. “Higher yields in the United States should attract foreign flows of capital, potentially reducing yields further.”

Bond bulls have been on a roll this year as mixed domestic data, coupled with signs of slowing growth around the world, stayed the Fed’s hand in raising rates following liftoff from near zero in December. Officials have twice cut projections for the path of increases as economic weakness and market volatility undermined efforts to tighten policy while central banks abroad add to easing measures. Treasuries have returned more than 5% this year, according to Bloomberg’s U.S. Treasury Bond Index.

Benchmark 10-year Treasury note yields fell one basis point, or 0.01 percentage point, to 1.54% as of 5 p.m. ET, according to Bloomberg Bond Trader data. The price of the 1.5% security due in August 2026 was 99-21/32. Ten-year yields set a record-low 1.318% on July 6.

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The market-implied probability of a Fed rate boost by year-end was about 47% Thursday, futures data compiled by Bloomberg show.

Guggenheim’s chief investment officer, Scott Minerd, has previously called for 10-year yields to fall as low as 1%, dragged down by record-low borrowing costs around the world. Joining him in that camp are other bond bulls such as Morgan Stanley’s Matthew Hornbach, who has forecast a 1% yield on the 10-year note for the first quarter of 2017.

“The most notable change in our portfolios with more conservative guidelines was adding to duration,” Guggenheim money managers led by Anne Walsh wrote in the report, citing allocations to long-dated Treasuries and zero-coupon debt. “We believe rates will move lower over time as a result of additional central bank monetary expansion and bond buying.”

The release Wednesday of minutes from the Fed’s July policy meeting revealed officials were divided on the best path for interest rates. New York Fed President William Dudley, who said on Aug. 16 that a hike was possible as soon as September, reaffirmed that view Thursday, saying GDP growth will “be quite a bit stronger” in the second half of 2016.

Investors await further guidance from Fed Chair Janet Yellen, who will speak Aug. 26 at a meeting of global policy makers in Jackson Hole, Wyo.

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