GMO Says Treasuries Have Lost Their Appeal in Zero-Rate World

Jeremy Grantham’s GMO says it’s time to give up on U.S. Treasuries as a zero-rate world will force investors to consider high-yield corporate bonds and emerging-market debt.

Government bonds yielding next to nothing have so lost their appeal that investors have little choice but to look elsewhere, GMO’s Ben Inker said in a quarterly letter to investors Monday. Among his suggestions is to consider cutting an equity allocation to 50% from 60% and adding 10% to riskier debt.

“There was a real charm to owning Treasuries bonds,” Inker, the firm’s head of asset allocation, said in an interview. “That insurance payoff in bad times was a pretty valuable thing. If it’s not there, you want to be looking to other parts of the fixed-income universe.”

GMO is known for making bearish market calls, though sometimes so early it has hurt performance. This year, the firm slashed its exposure to equities in May, warning of a possible bubble, only to see the S&P 500 rise 15% in the past three months. Its flagship Benchmark-Free Allocation Fund has lost 5.9% in 2020, and is in the bottom of its class for 60/40 funds.

Low rates -- which are likely to be around for years after the recent Federal Reserve policy change -- mean that “taking more credit risk in return for higher yield I think makes sense,” Inker said in the interview.

While taking on lower-quality debt in the defensive part of a portfolio isn’t ideal, Inker said in the letter that low rates and the higher risks that government bonds now carry make it unavoidable.

“Investors would be well advised to think critically about not only what their fixed-income portfolios can feasibly achieve going forward but also what the implications are for the amount of risk they can afford to take across the rest of their portfolios,” he wrote.

©2020 Bloomberg L.P.

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