Benchmark Treasury yields have been rising again, signaling a potential bond rebound. The stock market volatility could be driving investors back into the safe confines of the bond markets.
Furthermore, weaker economic data could add a roadblock to growth and increase forecasts of a recession. Inverting yield curves paired with a hawkish U.S. Federal Reserve have been causing market pundits to wonder whether wage inflation will keep up with rising consumer prices and the increased cost of borrowing.
“We are not completely out of the woods with inflation — so, therefore, there’s a chance you could possibly see slightly higher yields from here,” said Yvette Klevan, a portfolio manager in the global fixed income team at Lazard Asset Management. “I’d argue that at roughly 3% on the 10-year Treasury, a lot is already baked in.”
Adding to that wall of worry are geopolitical tensions. Namely, the ongoing Russia-Ukraine conflict and renewed lockdowns in China amid a COVID-19 surge.
“The shift in sentiment has been evident over the past two weeks amid speculation that China’s Covid-19 lockdowns, the war in Ukraine, and tighter monetary policy worldwide will exert a drag on growth. On Tuesday, 10-year yields dropped as much as 13 basis points to 2.72%, the lowest since April 27 and down from as much as much as 3.2% on May 9,” Bloomberg reported.
Looking for Value
Bond markets could be depressed to a point where bargain hunters are returning with renewed interest. Of course, the Fed will undoubtedly have something to say about that should an increasingly hawkish stance occur, but there can only be so much tightening.
“It’s in our DNA to look for value in a gloomy bond market, and after a dismal ’94, bonds did well the following year,” said Mark Lindbloom, a portfolio manager at Western Asset Management. “We know from past cycles that the Fed tightens too far, and we think we’re near the point where higher interest rates slow consumer and business demand.”
For a fund with a dynamic, active management slant that can find value, there’s the T. Rowe Price QM U.S. Bond ETF (TAGG). TAGG seeks to outperform the Bloomberg U.S. Aggregate Bond Index, which is broadly diversified, containing a mix of investment-grade, fixed income instruments that have varying maturity dates.
The portfolio manager generally invests in a way that creates a similar risk profile to the index but will use quantitative modeling (QM) and fundamental research to outperform the index. This means that sometimes the fund can be overweight or underweight compared to the index.
Unlike static index exposure, TAGG’s active approach can maneuver and respond to changing markets. With an expense ration of only 0.08%, TAGG provides active core fixed income exposure at a cost typically found with passive ETFs.
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