Treasuries Yielding Next to Nothing Aren’t Hedge They Used to Be

(Bloomberg) -- Cratering U.S. Treasury yields may be eroding the haven quality of some of the world’s safest assets, according to a growing chorus on Wall Street.

Goldman Sachs Group Inc. says the coronavirus panic-driven plunge in yields makes the sovereign debt vulnerable to a correction, while BlackRock Investment Institute said Treasuries are getting weaker as protection when stocks sell off. Cash and bills may be the better defensive bet now, according to Tallbacken Capital Advisors.

“One question to ask is if nominal bonds still carry the same insurance value,” Goldman analysts Praveen Korapaty and Avisha Thakkar wrote in a note. “Unless central banks show a willingness to cut deeply into negative territory, we think the answer is no, at least for the larger bond markets like the U.S., euro area and Japan.”

Yields on 10-year Treasuries have plummeted as much as 160 basis points this year, reaching a historic low of 0.31% on Monday as soaring virus infections globally and a shock price war between the world’s biggest oil producers sent investors rushing for shelter.

The yield has since rebounded, to about 0.7% Wednesday. The Bank of America Merrill Lynch MOVE Index, which measures implied price swings in Treasuries, rose Monday to its highest level since 2009.

‘Great Profits’

Investors who bought longer-dated U.S. bonds would have made “great profits,” but now may be the time to sell, according to Michael Purves, chief executive officer at Tallbacken in New York.

“We think there is risk of aggressive profit taking and for yields at the back end to rise,” Purves wrote in a note. “We suggest cash/bills is the real safe haven right now, and not the 10- or 30- year.”

However, the dramatic haven flows into Treasuries show that much of the market still sees the asset as a safe refuge. Asset Management One Co. says U.S. bonds are cheap even amid the rally. Guggenheim Partners said the yields could fall below zero as recession hits, while Jack Malvey, a Lehman Brothers veteran, reckons a “decent part” of the curve should end up negative.

Diminishing Buffer

Still, count the world’s biggest money manager among those touting increased caution on the asset class.

While BlackRock favors Treasuries over lower-yielding peers, it’s increasingly wary of their effectiveness as a hedge as daily market swings become more volatile.

“We recognize Treasury allocations are playing their role during moments of high uncertainty, but see risks of a diminishing buffer against equity market sell-offs and a snap-back in yields from historically low levels,” according to a Tuesday note from the firm.

M&G Investments recently sold some Treasuries, partly due to the potential for sharp corrections, said Pierre Chartres, fixed-income investment director in Singapore.

“Ten-year U.S. Treasuries yielding 0.8% is not good value in an environment where the situation normalizes,” he said. “Yields will start to rise again, and you can make some capital losses by owning Treasuries.”

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Joanna Ossinger

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