Deepening Bond Rout Has BlackRock, Columbia Favoring Short End

Bond investors are coalescing around a segment of the Treasurie market that offers a measure of protection from this year’s brutal rout and also positions them for the recession that some still anticipate.

BlackRock Inc. and Columbia Threadneedle Investments are among firms favoring notes due in roughly one to five years as Treasuries head for a record third straight annual decline, led by losses in longer maturities. Those tenors in particular have been buffeted by a resilient economy and the government’s swelling borrowing needs.

Treasuries slumped a fifth consecutive week after hotter-than-forecast US payrolls data on Friday boosted expectations that the Federal Reserve will raise interest rates again this year. Ten- and 30-year yields reached the highest since 2007, extending the massive resteepening of the yield curve that’s been a key dynamic of the past month’s abrupt selloff. It’s the kind of shift in the curve that’s tended to precede a recession in the past.

Treasury Yield Curve Has Steepened Over Recent Months

The jobs data may highlight the economy’s strength now, but some market watchers see it raising the risks down the road as the Fed holds rates higher for longer. Surging long-term yields are adding to the headwinds to US output, which is already facing a hit from the resumption of student loan payments and a strike by auto workers.

“It is most likely that growth is being mispriced next year,” said Ed Al-Hussainy, a global rates strategist at Columbia Threadneedle. “You can say people have positioned for a recession prematurely and have been burnt, but you can only look forward, and today you are seeing rates now discounting very elevated real and nominal rates well into the future.”