Is Investing in Treasury Bonds Still Low Risk? Bank of America Strategist Weighs In - WSJ's Take On the Week

Wall Street Journal

8 hours ago

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This is WSJ's Take On the Week where co-hosts Gunjan Banerji, lead writer for Live Markets, and Telis Demos, Heard on the Street's banking and money columnist, cut through the noise and dive into markets, the economy and finance—the big trades, key players and business news ahead.
Later on the show, Meghan Swiber, senior U.S. rates strategist at Bank of America's investment banking arm BofA Securities, shares the latest happenings with the world's largest bond market, the U.S. Treasury. Long-term Treasury bond yields have risen in recent months, raising concerns that U.S. or international investors are backing away from assets that are usually considered risk-free. She explains what's going on, and how investors should think about volatility in what usually feels like a placid part of the market.
On WSJ's Take On the Week, co-hosts Telis Demos and Gunjan Banerji start the show by explaining how financial trading platform Robinhood's stock may tell investors what they need to know about the markets right now. They discuss how company's CEO, Vlad Tenev, recently visited the White House to discuss ' MAGA Accounts ,' President Trump's proposal for a new tax-preferred savings account for children. Plus, with the Federal Reserve's next interest-rate decision coming this week, the hosts share how tariffs may play a role in the question of when to cut rates.
Full Transcript
This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.
Gunjan Banerji: Hi everyone. I'm Gunjan Banerji.
Telis Demos: And I'm Telis Demos.
Gunjan Banerji: And this is WSJ's Take on the week, a weekly show about money and investing. Telus. I think there's one stock out there that tells you almost everything you need to know about markets right now.
Telis Demos: What's that? It's Nvidia, right?
Gunjan Banerji: It's not Nvidia. It's not Nvidia, and it's not a big tech stock. I think it's Robinhood. The brokered stock. Robinhood stock has roughly doubled this year, and I really think of this as a bull market stock, the type of stock that does really well when stocks are rising. People want to make YOLO bets when people are feeling good about markets, and I was pretty shocked to see that it's roughly doubled this year, especially after all those tariff fears, all those recession fears that dominated just weeks ago.
Telis Demos: Well, I guess volatility is good for the trading business and it's been such a journey for Robinhood, right? I mean, we had Vlad Tenev on the show, the CEO of Robinhood previously, and even back then we were already talking about how from the dark days of the meme stock mania and the challenges that raised for Robinhood's business to its sort of renaissance with the Trump trade and everything, everybody being bullish about things and now it seems like it really solidifies. I think that one of the major investment themes lately has been investment, like investing in investment and how it's changing. So it's weird to think of investing itself being an investment, but it has been a very good one of life.
Gunjan Banerji: And like Robinhood said, just this month that stock trading is up on the platform, crypto trading is up on the platform, options trading is up. So all these really risky things have kind of stayed in vogue and people are trading them on Robinhood.
Telis Demos: People have not been scared away from that. And Robinhood now has found itself in the middle of politics too, when-
Gunjan Banerji: The Trump accounts.
Telis Demos: ... The Trump accounts. So this is potentially part of the OBBB, the one big beautiful budget Bill. I don't know, I'm not counting my Bs. I may have too many or too few in there, but you know what I'm talking about Trump's budget and the Republican budget.
Gunjan Banerji: Sure.
Telis Demos: Basically, it's a brokerage account that you would give to kids. Every kid would get some sort of brokerage account, and Robinhood has said that it could provide the technology for these accounts, and they even, I think, sent around screenshots of what that would look like. And Vlad Tenev, again, the Robinhood CEO was at the White House to talk about this with some other executives.
Gunjan Banerji: Yeah. I'm curious to see how that shakes out in this bill. One of the most surprising things to me, and I think a lot of investors out there, is just how this appetite for risk taking hasn't really gone away despite higher interest rates. And now I think after this recent inflation report, which showed that inflation is cooling, people are wondering, "Hey, are we going to get lower interest rates soon?"
Telis Demos: Yeah, I definitely think bullish people are going to feel vindicated by the fact that it seems like there's a case now to be made a lot stronger that maybe the Fed should in fact cut rates this year. A lot of people have been saying for a while that they don't think they will. If you read a lot of Wall Street economists, a number of them have a case that the Fed can't really cut rates in 2025.
Gunjan Banerji: That will be in higher for longer, for much longer.
Telis Demos: And that the uncertainty about tariffs and their impact on prices will just sort of stay the Fed's hand. Jerome Powell famously said something like, wait and see many, many times during the last Fed Credits conference. But have we waited long enough and seen enough? I think that would be really interesting to hear from the Fed in this upcoming meeting.
Gunjan Banerji: And what we saw in trading in recent days around these inflation reports was people ramping up bets on two or more rate cuts this year.
Telis Demos: Our WSJ economics writer colleague Greg Ip, thinks that maybe there is a case to be made for the Fed to start cutting. But like I said, a lot of economists still think that the Fed probably won't. For example, the team at Bank of America, their B of A securities said that despite this last inflation report, they still think that there's a case to be made that the Fed won't cut rates this year. And I think that gets into what you and I have talked a lot about, and I think it's really become key for investors because let's face it, a lot of people have money in cash and money market accounts. A lot of people have bought bonds over the last couple of years, and that's the Treasury's market and what all of what the Fed does, what's going on with the U.S budget discussion, what that means for yields on U.S. Treasury bonds. That's why I think we have a really important conversation coming up. We called in the U.S. Rates strategist at Bank of America's B of A securities. Her name is Meghan Swiber, and she's going to talk to us about all the things going on in the U.S. Treasury market, which of course is the world's largest bond market. It's how the U.S. government funds itself. It's also how savers here in the United States and around the world kind of keep their money to earn a little bit of yield on it. And it's been a wild ride these last few months and it doesn't look like the wild ride is going to stop anytime soon. So when we come back, we're going to have that conversation with Megan.
Gunjan Banerji: I'm excited for this one.
Telis Demos: So we are here talking with Meghan Swiber. She is the senior U.S. rates strategist at Bank of America's B of A securities. So the Treasury market.
Meghan Swiber: Yes.
Telis Demos: Not something that most of us think about as a super exciting part of the market most of the time.
Meghan Swiber: Maybe not most of us.
Telis Demos: Okay. Well, well, let's see. So I guess to you, the Treasury market is always exciting.
Meghan Swiber: Always an interesting place. Yes, the Treasury market for sure, maybe is not the top of everyone's minds all the time, but U.S. interest rates really are such a barometer and a price setter for everything else. So it's a very fundamental market, which is why when something goes awry, it captures market attention across the board.
Telis Demos: And I guess to a lot of us, it feels like the Treasury market is more volatile than usual.
Meghan Swiber: Yes.
Telis Demos: Is that actually the case, or is it just because we're paying attention?
Meghan Swiber: So one of my favorite charts tell us, if you look at intraday volatility in Treasury yields, you kind of standardize this over time. There's two very big blips that stand out in the history over the past couple of decades. One is COVID and one is-
Telis Demos: I've heard that.
Meghan Swiber: ...What we saw in April. So certainly what we are seeing in U.S. Rates, volatility is elevated as we've been discussing. It's been a huge focus across clients, across markets. But yes, indeed, we're seeing very elevated rates, volatility in the U.S. Market. This is coupled with concerns around liquidity and market functioning and treasuries. Usually when we see these big blips, it means that something else is going on. It means that investors are changing risk taking, which can usually exacerbate moves that we see in rates. Things are settling down a bit in rates, but it's still definitely a focal point for folks as everyone's still trying to understand what is going on in the macro environment. And rates are the place where we see that priced most clearly.
Telis Demos: And we are so focused on the Treasury market, I guess for a couple of reasons. One of which is it's basically the world's largest bond market. Is that correct?
Meghan Swiber: Correct.
Telis Demos: Okay. And it also is obviously where the U.S. Government goes to fund itself. The treasuries market, as the name implies, are issued by the US Treasury, and that's when the government, which I don't know if anyone knows this, on occasion the government spends more than it takes in. And so it has to go out and borrow. And it does this by selling treasuries to the market. Right?
Meghan Swiber: Yes, yes, yes.
Telis Demos: Okay.
Meghan Swiber: And so the other reason why they're so important is because they're thought of as the global risk-free asset class. So when equities, when things are selling off and hitting the fan, usually what we see is investors rush to treasuries to be that important diversification product. When we think about some of the volatility that we saw in April, what stands out to us is that you had certain parts of the Treasury curve not behaving in that normal way that we see. And that's driving a lot of questions for multi-asset investors who are scratching their heads thinking, "Okay, well if it's not treasuries, what else should I be buying to better diversify my portfolios?"
Telis Demos: What makes treasuries risk-free? Can you define what that means for us.
Meghan Swiber: Well, it's generally believed to be the case that the Treasury is going to be paying back those debts, those obligations. I don't really think that that's what's being called into question here. Everyone does have still thought of the U.S. As a credible creditor.
Telis Demos: Though it was downgraded.
Meghan Swiber: Though it has been downgraded
Telis Demos: The credit rating of the sovereign credit rating of the United States.
Meghan Swiber: Yes. And it's because when we look at... While investors, I think in the near term have conviction that Treasury is going to be paying back its obligations, we look at what the trajectory looks like over the next decade and things get a little hairy. What we're seeing right now is the demand base spires across the Treasury curve behave a little bit differently than we've seen previously. And we're seeing that happen alongside, still very notable issuance that has to be coming from Treasury. So when we look at the deficit trajectory over the next 10 years, we have the latest expectations from CBO on this. One thing that stands out to us is that even if you look at interest rate expenditures in about 10 years time, interest rate expenses alone are expected to be about the size of the deficit in total last year. So this is becoming an increasingly large chunk of what Treasury has to go out and finance itself to pay for. And it means that legislation and politicians, there's a component of the deficit every year that's becoming less and less tangible in terms of what policymakers can change.
Telis Demos: All right, so you brought up a few things that I think help us understand why the Treasury market isn't focused.
Meghan Swiber: Right?
Telis Demos: You mentioned the deficit, right? And that's a topic of conversation right now, I guess for a few reasons. One of which is of course, that the Republicans who control both the presidency, the House and the Senate, are right now coming up with a budget and the numbers you mentioned CBO, the Congressional Budget Office. The estimates are that it is going to continue to... The U.S. government will continue to run a big deficit. They're going to be tax cuts offset with some spending cuts, but not enough now, I feel like I've been having this conversation for my entire adult life with people hearing about this concern. Why now? Why is this particular budget episode rattling the U.S. government bond market So much?
Meghan Swiber: So it's coming at a time when investors are thinking about this shift in correlations that we're seeing in treasuries. And it's also coming at a point in time when we're seeing foreign private investors who make up a very big chunk of Treasury holdings. They hold about a third of the Treasury market right now. Are rethinking how they want to be allocating to treasuries. Deficits have been high for some time now. They were certainly higher during the pandemic, but what we're seeing is that the buyer base in treasuries is changing and they're rethinking this natural risk off asset class premium that treasuries have been trading with. And this is coming at a time when a lot of investors are stepping back and saying, well, deficits appear to be only going higher and we'll continue to have a 2 trillion or so handle over the next several years. So it's this contemplation of more issuance to come from Treasury, but it's also coming alongside the way investors are thinking about how much they want to be allocating to treasuries. As we saw a lot of this volatility take place in the Treasury market in April, one thing that we saw alongside that was a lot of volatility in the U.S. dollar, right? We saw a very sharp depreciation of the U.S. dollar.
Telis Demos: Okay. We also saw that here too.
Meghan Swiber: That really still hasn't recovered fully from that episode. And while we've seen risk assets broadly recover from what we saw in April, we're still seeing the dollar trade a lot weaker. So investors' perception of the dollar overall is actually a very important component of this.
Telis Demos: So for a trader, what it ultimately relates to is worries about the dollar, which at the heart of that are what our really worries about the long-term health of the U.S. economy that we won't be able to grow enough to pay for this additional borrowing.
Meghan Swiber: Yes.
Telis Demos: Is that what you would say is ultimately when you kind of dig down is at the base of this is worries about the U.S. economy?
Meghan Swiber: Yes. I think that's at the base of it, but it's also tell us when we think about portfolio construction, a lot of these relationships and a lot of the reason why people allocate certain risks to dollar U.S. Treasury securities is because of the negative correlations that we see between Treasury returns and other asset classes,
Telis Demos: Meaning that treasuries perform inverse. When your stocks are doing poorly, your bonds are doing well, right?
Meghan Swiber: And the dollar-
Telis Demos: We're all used to that even as individual in our retirements. Right?
Meghan Swiber: Our own portfolios.
Telis Demos: I guess the classic 60/40 allocation.
Meghan Swiber: And what everyone's trying to understand now is whether or not the shift in correlations that we've seen between the dollar treasuries, high yields equities, is that fundamentally changed or does that come back to what we saw pre April when we usually see the dollar appreciate in bad states of the world when we usually see treasuries rally in when we're worried about macroeconomic downside risks? So the question is whether or not we stay in this current environment, which really limits capacity for many, many asset managers investor basis to take down Treasury debt.
Telis Demos: The Treasury sells different products, right?
Meghan Swiber: Yes.
Telis Demos: They sell bills that mature in a couple of months. They sell bonds that mature in 30 years. And so the short end of the curve is kind of something closer to what we think of as the cash in our pockets. It's not giving money to the Treasury for 30 years. It's a short obligation. And so the cash that we all have in our portfolios is that kind of what everyone wants to own right now is basically just be in cash.
Meghan Swiber: But also what we see is that if things really do go badly for the U.S. economy and we're in a recession, there's greater conviction that the Fed is going to cut rates over the next five years and that will lower and compress these shorter tenor rates versus the long end of the curve.
Telis Demos: You don't want cash in that scenario. Okay, but...
Meghan Swiber: Right. Exactly. Exactly. So the fact is that the market believes that there's more capacity for yields that the front end of the curve to move lower than the long end of the curve if the Fed has to cut rates because we're seeing more of that sensitivity between the front end of the curve and Fed path than the long end of the curve and the near the near-term expectations for what the Fed will do.
Telis Demos: But I don't think you guys at Bank of America think that the feds going to be cutting net aggressively.
Meghan Swiber: That's right. That's right. But the way investors are set up in their portfolios when they're trying to think about risk allocations versus where on the curve they want to be buying the part of the curve that will still demonstrate some of this diversification benefit risk assets sell-off is going to be the front end of the Treasury curve where you have greater capacity for rates to rally in that situation.
Telis Demos: So is there still a hope that the economy can basically continue to grow strongly enough to just sort of erase a lot of this problem to soothe people's concerns that the U.S. Won't be able to pay its debts in the future without... I mean, obviously the US can always print more money to pay these things, but if it has to inflate the currency to do so, that's kind of bad for your bonds. Is there still a pathway here to normalizing if the economic data that we keep seeing comes in pretty strong, will that sort of make everybody feel a little bit better about this stuff?
Meghan Swiber: I think it can to a certain degree, if we continue to see better data come in, the question is can we see the dollar recover at all from the notable weakness that we see even on the back of a pretty strong labor market print? But what is a bigger issue here is the fact that even if the economy does muddle through, we avert this recession, growth is relatively strong. We still worry about the demand base for Treasury securities because usually in these very bad states of the world, when we're worried about the performance of risk, we usually see this huge pickup in demand for Treasury securities. But what we have right now is the fact that the market's pricing and expecting inflation risk. The Fed is expecting upside risks to inflation and fixed income securities don't usually do well in inflationary states of the world, right? If you've got a fixed income stream, you're obviously going to demand more compensation to own that fixed income stream if you're expecting that prices are going higher. So inflation is a big issue here in terms of thinking about the general demand base for the Treasury market overall right now. And it also means that if inflation can prove more persistent, which risks happening, if the economy is more well-supported, that there's less capacity for the Fed to cut rates and therefore there's less of this demand for investors to want to buy rates at any part of the curve because they're worried that there's less concern that the Fed is ultimately going to be lowering rates and us being able to seem to ration rally in earnest.
Telis Demos: Let's just pause to remember that U.S. Treasury yields on those longer-term bonds, 30 years, 10 years, five years, are right now basically in the ballpark of the highest they've been since before the 2008 financial crisis. Right?
Meghan Swiber: Yes.
Telis Demos: Which means they're cheap, which means they're really cheap. Stocks on the other hand are very expensive. Right now, the price earnings multiple on the stock market is quite high. So as an investor thinking about my retirement and stuff, should I be buying treasuries at these nice big fat yields or do I have to worry that things are going to get worse from here and if I buy them now, I'm basically going to regret not buying them when they were yielding six or seven or 8%. How do you think an investor thinking about their longer term should be behaving right now?
Meghan Swiber: So time horizon is important here. And when we think about buyers in the Treasury market, a lot of them have mark to market risk where they're worried about how treasuries are going to perform over the next 12 months. When we look at this from even a technical perspective in terms of how high yields can get when you don't have this very firm buyer at the back end of the market, usually we think pensions and insurance companies can be the ones to kind of swoop in and buy more supply if yields get to a certain level. We're really not hearing that from a lot of the pensions and insurance companies that we talk to.
Telis Demos: They're buying as much now.
Meghan Swiber: They're not buying as much-
Telis Demos: Another buyer-
Meghan Swiber: They're not as convicted that 30 year yields can only get to 5.2%, right? So the issue is that certainly if you're going to hold, buy and hold that 30 year Treasury security to maturity, it's a great part of a total portfolio construction plan, right? There's certainly a lot of risks and a lot of reasons why we should believe that 30 year yields should be trading below 5% over time, especially if the Fed does have to cut rates more than what the market is pricing, or if we end up in a recession over the next 30 years. All of these things seem very plausible in 30 years, but if you're thinking about what your mark to market on holding that 30 year Treasury security is going to be over the next 12 months, we don't have a lot of conviction to say that 30 year rates are definitely going to be lower versus higher.
Telis Demos: We're going to take a quick break, and when we come back, we've got one more question for Meghan Swiber of B of A Securities. All right, we're back with Meghan Swiber. Megan, we've got one last question for you in 30 seconds or less, we've heard some high profile people, the likes of Jamie Dimon talking about the Treasury market breaking. Can the Treasury market really break? Is that possible?
Meghan Swiber: So not in an environment where we have a fed and Treasury that's willing to step into the market and calm major sources of dysfunction. Now, when the Fed looked at what we saw in April was not enough to get them to get stopped back into the market, but what they're going to pay a lot of attention to is funding and yield levels.
Telis Demos: All right? So once again, the Fed will ride to the rescue as it has so many times for us in the past.
Meghan Swiber: Quite likely.
Telis Demos: All right, Megan, thanks so much.
Meghan Swiber: Thanks for having me.
Telis Demos: And that's what you need to know to take on your week. This show is produced by Jess Jupiter, Jessica Fenton, and Michael Lavelle. Michael Lavelle and Jessica Fenton are our sound designers. And Michael also wrote our theme music. Aisha Al-Muslim is our development producer. Scott Saloway and Chris Zinsli are the deputy editors. And Philana Patterson is the head of news audio for the Wall Street Journal for even more head to Wsj.com. I'm Telis Demos.
Gunjan Banerji: And I'm Gunjan Banerji. Until next time,
Telis Demos: Sometimes they will talk just to me.
Meghan Swiber: Okay. Yeah, I was going to say...
Telis Demos: When we want to talk about you.
Meghan Swiber: All right, there we go. There we go.
Telis Demos: It's like we have a... We've taken the high school cafeteria and just turned it into a digital, digital reality here.