Investors Flock to Short-Term U.S. Government Bonds Amidst Upheaval in Longer-Term Yields
Investors seeking refuge from the chaos caused by a surge in longer-term yields have turned to short-term U.S. government bonds, according to a Goldman Sachs executive. Lindsay Rosner, head of multi-sector investing at Goldman Sachs asset and wealth management, noted that an auction this week of 52-week Treasury bills at a rate of 5.19% was 3.2 times oversubscribed, marking the highest demand of the year.
“Their rationale is that they are now able to earn a lot more yield in the very front end of the curve in government paper,” Rosner said in an interview with CNBC, referring to 1-year T-bills. “That is really where you’re seeing investors flock.”
This strategy is seen as a key way for institutions and wealthy investors to adapt to the recent surge in long-term interest rates that has shaken markets. The 10-year Treasury yield, in particular, has experienced a significant climb in recent weeks, reaching a 16-year high of 4.89% after the September jobs report indicated robust hiring activity. Bloomberg data shows that investors poured more than $1 trillion into new T-bills during the last quarter.
Rosner explained that this investment strategy takes advantage of the expectation that interest rates will remain higher for a longer period than previously anticipated. If this sentiment holds true, longer-duration Treasuries such as the 10-year bond are expected to offer better yields next year as the yield curve steepens.
“You get to collect a 5% coupon for the next year. Then, in a year, you may have opportunities [in longer-duration Treasuries] at greater than 5% in government securities or potentially in [corporate bonds] that are now properly priced,” Rosner elaborated. “You could then get a double-digit yield, but be confident about valuation, unlike now.”
While 10-year Treasuries have experienced a sharp decline in recent weeks, other fixed income assets such as investment-grade and high-yield bonds have not fully reflected the change in rate assumptions. Rosner cautioned that these bonds may not be favorable at the moment, but could present opportunities in the future.
The recent upheaval in longer-dated Treasuries has prompted professional managers to reduce the average duration of their portfolios, according to Ben Emons, head of fixed income at NewEdge Wealth. He noted that Treasury bills are in high demand for those looking to manage duration in their portfolios, including BlackRock.
As investors look for stability amidst market turbulence, short-term U.S. government bonds have become a favored option. With the expectation of higher yields in the future, investors are finding solace in the front end of the yield curve, hoping to weather the storm caused by the blowout in longer-term yields.