Graphic: Policy uncertainty drives investors into US medium-term bond funds

Federated Hermes

20/03/2024 13:41

By Patturaja  Murugaboopathy 
       March 20 (Reuters) - Investors are flocking to U.S.
medium-term government bond funds and helping push their assets
to record highs, as uncertainty about the Federal Reserve's
policy path prompts them to seek the sweet spot between income
and protection.
    According to Morningstar Direct data, U.S. medium-term
government bond funds, which include Treasuries and debt issued
by government-linked agencies, attracted $9.8 billion in the
first two months of this year. That compared with just $2.3
billion for long-term government funds and an outflow of $3.5
billion from short-term government bond funds. 
    Assets under management (AUM) at U.S. medium-term government
bond funds stood at a record $252 billion at the end of
February, up 2% this year, the data showed. By contrast, the AUM
at U.S. short-term and long-term government bond had dropped
3.8% and 2.7% to $93.4 billion and $158.3 billion respectively. 
    The rush into medium tenors has been driven by shifting
expectations for Fed policy. In early 2023, as the Fed's swift
policy tightening caused the yield curve to invert, investors
sought short-term bonds for their yields.
    Bond prices move inversely with yields. So, as talk of rate
cuts grew in the second half of last year, investors flocked to
long term bonds whose yields would tend to fall more, hence
boosting their prices and yielding capital gains. 
    The scenario has changed again this year. As the Fed
contemplates cutting rates but inflation remains sticky, markets
have gone from pricing six rate cuts in 2024  FEDWATCH  at the
end of December to now expecting just three rate cuts -
reshaping investor strategies in the bond market once more. 
    "Some of this uncertainty in the rate path could be a driver
of moving towards the middle of the curve, as investors want to
have duration exposure, but don’t feel confident enough in the
Fed path to be long on the yield curve," said Michael Parnell,
senior strategic research analyst at Verus. 
    The U.S. central bank is likely to keep borrowing costs
unchanged at its Wednesday meeting, while new projections may
hint at a slower and delayed approach to future rate cuts. 
    Analysts say medium-term bonds offer the best of both
scenarios, helping investors tie up current high yields for a
reasonably long period of four to 10 years while mitigating the
risk of big price losses on longer tenor bonds should yields
keep rising.
    "Medium-term bond funds could continue to attract more flows
over the next few quarters as they present a nice income
opportunity and an appealing risk and reward profile for price
action relative to duration, culminating in an attractive total
return opportunity," said Karen Manna, portfolio manager at
Federated Hermes.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Monthly flows into U.S. short-term, medium-term and long-term
government bond funds    https://reut.rs/43s2Inf
Asset under management for U.S. medium-term government bond
funds    https://reut.rs/4cknRDZ
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Patturaja  Murugaboopathy; Additional reporting
by Gaurav Dogra in Bengaluru; Editing by Vidya Ranganathan and
Mark Potter)
 ((patturaja.muruga@thomsonreuters.com;))