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Business Times
5 days ago
- Business
- Business Times
Long-bond revolt pressures 60/40 comeback in chaotic market
A SLUMP slump in US long-dated bonds is clouding the comeback of a classic investment strategy. The so-called 60/40 portfolio – long recommended for investors who want to balance exposure to risk with a cushion of safer, steady income – calls for allocating 60 per cent of holdings to stocks and 40 per cent to bonds. While a bedrock for retirement savers over decades, the approach lost some of its luster in recent years as its underlying mechanism fell out of whack, with US stocks and bonds moving more in lockstep rather than offsetting each other. This year, the strategy has come back into its own, performing as advertised even amid violent swings in both stocks and bonds. A US gauge of the 60/40 mode returned some 1.6 per cent this year through mid-May, besting the S&P 500 index's return in the period, and with lower volatility, according to data compiled by Bloomberg. A key part of the revival has been the return of the traditional inverse relationship between stocks and bonds. The correlation between US equities and fixed income over the past six months has reached the most negative level since 2021, meaning bonds tend to rise when stocks fall, and vice versa. 'A balanced approach does make sense in the longer term,' said Jeff Given, a senior portfolio manager at Manulife Investment Management. One recent major development has cropped up, though, to threaten that balance. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Benchmark 30-year Treasury bonds have tumbled this month, sending yields above 5 per cent towards the highest in almost two decades, as investors grew increasingly wary of holding long-term US sovereign securities amid spiralling debt and deficits. The selling increased last week as Republican lawmakers haggled over US President Donald Trump's signature tax-cut Bill that would add trillions of dollars to already bulging Budget gaps. Moody's Ratings stripped the US of its top credit rating this month, citing deficit concerns. Rising long-term US yields – along with those in Japan and the UK – spilled over across financial markets as equities declined along with the US dollar. The simultaneous sell-off of US assets was reminiscent of what happened earlier in April, when Trump's aggressive 'Liberation Day' trade policies roiled global markets and doubts about US bonds' status as a haven started creeping in. 'What you are seeing in the back end of the curve globally is that they are behaving like risk assets, not like the typical kind of defensive risk-averse assets,' Greg Peters, co-chief investment officer at PGIM Fixed Income, said on Bloomberg Television. Treasury Secretary Scott Bessent said on Friday (May 23) on Bloomberg Television's Wall Street Week with David Westin that he was not concerned about the recent rise in long-term yields. He added that recent Treasury data he had seen showed foreign accounts stepping up purchases at the latest US debt auctions. As investors perceive more risk in long-term Treasuries, that poses a challenge to the 60/40 construction. But more broadly, the rationale still holds. For Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management, it may be more a case of the model being bent but not broken. The key is to pick the right bonds along the yield curve. While long-term bonds are pressured as investors demand higher yields to compensate for the deficit risks, shorter-term notes are holding up better, he said. That is because any economic slowdown would allow the Federal Reserve to lower interest rates, benefiting those securities as they are more sensitive to monetary policy and less vulnerable to fiscal concerns. 'I would not lose faith entirely in the ability of Treasuries or fixed-income securities to protect your returns,' Skiba said. 'While there is a lot of the concern that deficits impact bond valuations further out the curve, we do think that the front end is likely to behave as investors would expect, were slowdown fears to spike again.' The data bears out this view, with shorter-maturity bonds outperforming longer-dated securities year to date, a phenomenon known in Wall Street parlance as curve steepening. Even as 30-year yields have climbed by about a quarter percentage point this year, both two-year and five-year yields have dropped by nearly the same amount, as investors favored shorter-term debt and shunned the long end. The so-called steepener trade has become a favorite strategy among bond investors to play the theme of slower growth, and higher inflation and deficits. The outperformance of shorter to medium-term bonds also explains why the benchmark US bond index – which has similar interest rate risks to that part of the curve – remains negatively correlated to stocks. The average duration of the Bloomberg Treasury Index, a measure of interest rate risk, is about 5.7, less than half that of 30-year debt. Overall, Treasuries have lost almost 1.8 per cent so far in May, but are still up just over 1.7 per cent for the year after four months of steady returns. By contrast, the S&P 500 surged more than 4 per cent in May, but only after three straight months of declines that at one point took the index to the brink of a bear market. The gauge remains down year to date. 'Being broadly diversified in fixed income has worked, and it will continue to work,' Meera Pandit, global market strategist at JPMorgan Asset Management, said on Bloomberg Television. Treasury 10-year note futures declined 7/32 to 109 7/8 in Asian trading on Monday, equivalent to a rise of about three basis points in yield. Cash trading of US government bonds is shut globally for a holiday. Fuelled by positive signals on trade deals and solid tech earnings, the recovery of stocks has pushed S&P 500 valuations near historical highs. The earnings yield of the S&P 500, which measures how much investors are willing to pay for each US dollar of corporate profit, has dropped to 3.95 per cent, about half a percentage point below 10-year yields. The current valuation points to long-term stock returns of around 6 to 7 per cent, not particularly attractive when compared with the average yield of about 4.8 per cent in the Bloomberg Aggregate Bond Index, according to Manulife's Given. As for bonds, Given said he favours the so-called belly of the US yield curve, such as five-year notes, over longer-term bonds because of the risks around rising debt levels. 'I do think that belly may be a better risk hedge than 30-year Treasuries,' he said. Sameer Samana, head of equities and real assets at Wells Fargo Investment Institute, agreed. 'The S&P's resilience in the face of the deteriorating macro and fundamental background is an opportunity for investors to rebalance towards cash and bonds,' Samana said. 'However, we would not go too far out on the curve.' BLOOMBERG
Yahoo
23-05-2025
- Business
- Yahoo
Dollar Falls to Lowest Since 2023 as Investors Eye Trade Risks
(Bloomberg) -- The US dollar slumped to its lowest level since 2023 as new tariff threats from President Donald Trump and the risk of a widening fiscal deficit drag on the currency's appeal. NY Private School Pleads for Donors to Stay Open After Declaring Bankruptcy Can Frank Gehry's 'Grand LA' Make Downtown Feel Like a Neighborhood? NYC's War on Trash Gets a Glam Squad UAE's AI University Aims to Become Stanford of the Gulf Chicago's O'Hare Airport Seeks Up to $4.3 Billion of Muni Debt The Bloomberg Dollar Spot Index fell as much as 0.8% on Friday, extending a more-than-7% decline since the beginning of the year. The dollar is down for a fourth day in five after Trump's latest threats of tariffs — on the European Union and Apple Inc. — added to investor concern about the impact of his trade policies on the world's top economy. A 'large increase in tariffs on US imports from the EU once again brings forward the potential for recession risks in the US alongside higher policy and economic uncertainty,' said Aroop Chatterjee, a strategist at Wells Fargo in New York. The dollar's declines offered support for all of its Group-of-10 currency peers. Seven currencies out of the group rose 1% or more against the greenback, with New Zealand and Australian dollars leading advances. The Canadian loonie strengthened to as much as 1.3712 per US currency, its strongest level since October. The Swiss franc meanwhile rose to highest in over two weeks, trading at 0.8206 against the greenback Friday. The losses on Friday continued even after Treasury Secretary Scott Bessent said on Bloomberg Television's Wall Street Week with David Westin that the US could strike several large trade deals in the next couple of weeks. He also said that he wouldn't necessarily call the dollar weak, adding that the recent moves in foreign-exchange have been driven more by other currencies appreciating rather than the greenback softening. Dollar 'Jitters' Enthusiasm has been fading for the world's reserve currency for months. Speculative traders — including hedge funds, asset managers and others — hold some $16.5 billion worth of positions tied to the dollar weakening, around the most since September, according to Commodity Futures Trading Commission data for the week ending May 13. Some of the angst has come as the Senate considers Trump's tax bill, which includes a debt ceiling increase the Treasury needs to avoid a default that could happen as soon as August or September. The version of the bill passed by the House of Representatives is expected to add hundreds of billions of dollars to the federal deficit each year. 'The jitters with respect to the US budget suggest that the market is continuing to re-think the US exceptionalism trade,' Jane Foley, a strategist in London for Rabobank. 'Whether it be budget, inflation or growth concerns, investors are more wary of US assets and that is continuing to weigh on the dollar.' --With assistance from Carter Johnson and Naomi Tajitsu. (Updates market throughout, adds details on currency performance.) Why Apple Still Hasn't Cracked AI How Coach Handbags Became a Gen Z Status Symbol Inside the First Stargate AI Data Center Anthropic Is Trying to Win the AI Race Without Losing Its Soul Microsoft's CEO on How AI Will Remake Every Company, Including His ©2025 Bloomberg L.P. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
23-05-2025
- Business
- Yahoo
Bessent Sees Easing Capital Rule on Treasuries This Summer
(Bloomberg) -- Treasury Secretary Scott Bessent said that US regulators this summer may ease a rule that's served as a constraint on banks' trading in the $29 trillion Treasuries market. NY Private School Pleads for Donors to Stay Open After Declaring Bankruptcy Can Frank Gehry's 'Grand LA' Make Downtown Feel Like a Neighborhood? NYC's War on Trash Gets a Glam Squad Chicago's O'Hare Airport Seeks Up to $4.3 Billion of Muni Debt UAE's AI University Aims to Become Stanford of the Gulf 'We are very close to moving' on the so-called supplementary leverage ratio, Bessent said on Bloomberg Television's Wall Street Week with David Westin. He noted the three main bank regulators — the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. — are addressing the issue. Banks have argued the rule, which requires them to hold capital when they trade against their investments in Treasuries, crimps their ability to add to those securities in stressful times, as they are treated in line with much riskier assets. Loosening the rule would encourage them to boost holdings, some market participants say. Bessent cited estimates that tweaking it could reduce US Treasury yields by tens of basis points. 'I think we could see something on that over the summer,' Bessent said of changing the SLR. In a wide-ranging interview, the Treasury secretary also played down concerns about the recent selloff in the bond market, and rejected the idea that the dollar is 'weak' after recent declines. He predicted the Republican tax bill now heading to the Senate would help boost US economic growth toward 3% next year, assuaging concerns about government debt. After Bessent's SLR remarks, a popular hedge-fund bet that Treasuries will perform better than interest-rate swaps took a slight leg up. The wager, which had been shaken this week by a surge in long-dated yields, has hinged on a potential move by the Trump administration toward adjusting the SLR. Thirty-year US yields were trading at about 5.02%, with the spread against comparable-maturity SOFR swaps climbing by about two basis points on Bessent's timing guidance. ''We can see more bond buying by US citizens, US institutions,' he said. The Treasury chief was speaking at the end of another down week for US Treasuries, which has seen yields on benchmark 10-year notes climb above 4.5% and 30-year ones surpass 5%. The selloff deepened on Wednesday in the wake of an auction of 20-year government bonds that saw tepid demand, stoking anew concerns about the scale of debt that the Treasury must sell thanks to the gaping fiscal deficit. 'I'm not particularly worried about what the market is saying,' Bessent said. Increased government bond yields have 'been a global phenomenon' he said, citing higher rates in Japan, Germany and the UK as well. He disputed commentary that the recent rise in Treasuries yields was prompted by concerns about the Republican tax bill and projections it will worsen the US debt ratio compared with gross domestic product. 'This bill is going to create growth,' which will shrink the debt ratio, he said. 'I'm not worried about the US debt dynamics, because a change in the growth trajectory takes care of a lot of that,' he said, predicting that 'by this time next year we will be north of 3' in terms of the GDP growth rate. As for moves in the foreign exchange market, he said 'I wouldn't necessarily categorize them as a weak dollar.' There's been a reaction to economic policy moves in Germany and Japan, he said. 'So I think a lot of this is other countries' currencies strengthening, as opposed to the dollar weakening.' Foreign Buying The Bloomberg Dollar Spot Index hit its weakest level since December 2023 on Friday, after President Donald Trump threatened a sweeping 50% tariff on the European Union. Bessent also said that figures he's seen show that overseas demand for Treasuries remains strong. 'I have access to the data, and we've actually been seeing foreign national entities — whether it's reserve managers, sovereign wealth funds or pension funds — have been buying more Treasuries in the latest auctions,' he said. As for banks' demand for Treasuries, executives have offered differing perspectives on the impact of SLR relief. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last month said that for his bank, just changing the SLR wouldn't make a big difference, citing several other capital and liquidity rules that he believes need reform. 'Important' Reform By contrast, Goldman Sachs Group Inc. CEO David Solomon said last month that 'SLR relief would have a benefit to Treasury markets,' and that 'it's an important structural reform.' The SLR doesn't have risk weightings for assets — meaning it applies evenly to US government debt, which is widely regarded as the benchmark asset for the global financial system. The SLR's applicability to Treasuries was suspended during the Covid crisis, but it's since been reinstated. Bessent and Federal Reserve Chair Jerome Powell have previously expressed support for tweaking the rule. Bessent said Friday that 'it had a big effect' when the SLR was temporarily taken off during the pandemic. While the change may give banks greater appetite for Treasury bonds, it's unlikely to have a large impact on their overall capital requirements, because they also face risk-weighted rules and annual stress tests that help set minimum capital levels. --With assistance from Sydney Maki and Michael J. Moore. (Updates with further comments on markets, starting in fourth paragraph.) Why Apple Still Hasn't Cracked AI How Coach Handbags Became a Gen Z Status Symbol Inside the First Stargate AI Data Center Anthropic Is Trying to Win the AI Race Without Losing Its Soul Microsoft's CEO on How AI Will Remake Every Company, Including His ©2025 Bloomberg L.P.
Yahoo
23-05-2025
- Business
- Yahoo
Bessent Sees Easing Capital Rule on Treasuries This Summer
(Bloomberg) -- Treasury Secretary Scott Bessent said that US regulators this summer may ease a rule that's served as a constraint on banks' trading in the $29 trillion Treasuries market. NY Private School Pleads for Donors to Stay Open After Declaring Bankruptcy Can Frank Gehry's 'Grand LA' Make Downtown Feel Like a Neighborhood? NYC's War on Trash Gets a Glam Squad Chicago's O'Hare Airport Seeks Up to $4.3 Billion of Muni Debt UAE's AI University Aims to Become Stanford of the Gulf 'We are very close to moving' on the so-called supplementary leverage ratio, Bessent said on Bloomberg Television's Wall Street Week with David Westin. He noted the three main bank regulators — the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. — are addressing the issue. 'I think we could see something on that over the summer,' he said. In markets, a popular hedge-fund bet that Treasuries will perform better than interest-rate swaps took a slight leg up on Bessent's remarks. The wager, which had been shaken this week by a surge in long-dated yields, has hinged on a potential move by the Trump administration toward adjusting the SLR. Thirty-year US yields were trading at about 5.02%, with the spread against comparable-maturity SOFR swaps climbing by about two basis points on Bessent's timing guidance. Tweaking the SLR, which requires banks to hold capital when they trade against their investments in Treasuries, could reduce US Treasury yields by tens of basis points, Bessent said. The SLR doesn't have risk weightings for assets — meaning it applies evenly to US government debt, which is widely regarded as the benchmark asset for the global financial system. Banks have argued the capital rule crimps their ability to add Treasuries in stressful times, as they are treated in line with much riskier assets. The SLR's applicability to Treasuries was suspended during the Covid crisis, but it's since been reinstated. Bessent and Federal Reserve Chair Jerome Powell have previously expressed support for tweaking the rule. While the change may give banks greater appetite for Treasury bonds, it's unlikely to have a large impact on their overall capital requirements, because they also face risk-weighted rules and annual stress tests that help set minimum capital levels. --With assistance from Sydney Maki and Michael J. Moore. (Updates with details throughout.) Why Apple Still Hasn't Cracked AI How Coach Handbags Became a Gen Z Status Symbol Inside the First Stargate AI Data Center Anthropic Is Trying to Win the AI Race Without Losing Its Soul Microsoft's CEO on How AI Will Remake Every Company, Including His ©2025 Bloomberg L.P.
Business Recorder
19-05-2025
- Business
- Business Recorder
US stocks decline after Moody's downgrade
NEW YORK: Wall Street stocks fell early Monday after Moody's slashed the United States' credit rating as markets awaited further action on President Donald Trump's sweeping tax cut measure. Monday's session was the first since Moody's late Friday announced the downgrade, citing rising levels of US government debt and interest payment ratios 'to levels that are significantly higher than similarly rated sovereigns.' About 15 minutes into trading, the Dow Jones Industrial Average was down 0.4 percent at 42,490.30. The broad-based S&P 500 declined 0.7 percent to 5,914.20, while the tech-rich Nasdaq Composite shed 1.0 percent to 19,027.87. Wall Street Week Ahead: Retailers set to give tariff view as US stock market roars back The Moody's downgrade 'probably weighs on markets a bit here this morning,' Art Hogan of B. Riley Wealth Management. Markets are closely watching Congress, where the full House is expected to vote this week on Trump's fiscal legislation, which pairs tax reductions with cuts to health coverage for low-income Americans. A House panel narrowly approved the measure on Sunday. 'The attention of markets has shifted a bit from everything being about trade to everything being about getting a budget passed,' Hogan said. 'And in that light, there's probably a bit of caution coming into a new week.' Among individual companies, Walmart fell 2.3 percent after Trump slammed the company for warning of price increases due to his tariffs. Trump called on the retail giant to 'EAT THE TARIFFS' on social media, adding, 'I'll be watching.'
