Is Now the Time to Sell Treasuries?
The year 2018 has been marked as an important one for fixed income markets. So far it has been a year filled with speculation and uncertainty. One of the big-ticket items — the number of rate hikes that the U.S. Federal Reserve will conduct throughout the year.
Many have been forecasting significant increases in yields, expecting another one to three hikes this year. Currently though, even including June’s most recent 0.25% hike, interest rates have remained resilient. To illustrate, we’ve provided a chart of the US 10Yr Treasury Yield from December 2017 to June 27th, 2018.
Source: FactSet. Index: CBOE Treasury Note 10 Year (TNX). Time Period: 12/31/2017 – 6/27/2018.
As shown in the chart above, yields have only increased 0.422% from 2.405% to 2.827%. While this represents a substantial percentage increase of 17.55%, the absolute increase is actually less than the two 0.25% fed funds rate hikes that have already occurred this year.
Another point worth noting is that yields are currently 0.282% from their YTD high of 3.109%, equating to a -9.07% decrease. This is significant because it shows that bonds can still have a meaningful impact on a portfolio while maintaining their longstanding protectionary characteristics through the beginnings of the fed’s Quantitative Tightening (or QT).
As it stands today, the CME Group’s FedWatch Tool is predicting one additional hike this year in September. December’s meeting has the probability of a second hike just under 50%, at 42.4%.
Source: http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html, 6/28/2018.
Currently, our quantitative analysis shows no cause for immediate concern with risk characteristics of treasuries remaining relatively muted. We continue to hold a neutral allocation to treasuries in our GWS portfolio, seeking to take advantage of their defensive attributes during times of increased market volatility.
With that said, we believe that risk constantly changes and will be closely monitoring treasuries going forward. We will be prepared to adapt the portfolio in response to any relevant changes in risk.
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