🔒 Major funds bet the ‘anything but bonds’ trade is poised to end

In a strategic move, major US bond investors are redirecting their focus towards long-dated notes, anticipating a surge in value amid potential interest rate cuts. With yields on the rise, top mutual fund managers have noticeably increased their duration, favouring high-grade corporate bonds to evade the negative effects of government debt. As market sentiment shifts, long-duration bonds are emerging as a lucrative investment, hinting at a promising second half for savvy investors.

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By Hannah Benjamin-Cook and Natasha Doff

Big US bond investors have been aggressively shifting money into long-dated notes, betting that the unloved asset class will be one of the winners from eventual interest rate cuts. ___STEADY_PAYWALL___

The largest 20 mutual fund managers in the US have increased duration over the past two months as yields climbed, according to research by JPMorgan Chase & Co. Investors have been building positions by “piling into” high-grade corporate bonds to avoid the negative carry of government debt, said Nikolaos Panigirtzoglou, a global market strategist at the lender.

Long-dated corporate bonds are winning back investors who fled as the market dialed back bets on imminent easing by the Federal Reserve. Now, the allure is returning as markets price in two rate cuts this year after data showed US inflation ebbing for the first time in six months. 

“History shows pretty consistently that yields rally hard starting three to four months before the Fed actually starts cutting,” said Gershon Distenfeld at AllianceBernstein Holding LP, who recently extended duration in the $23 billion American Income Portfolio he manages. That could happen “a month or two from now, six months from now, or not until 2025,” he said.

The “anything but bonds trade” may now have run its course and long-duration debt is set for a comeback in the second half, strategists at Bank of America Corp. wrote in a note published Friday.

Fund managers increased their allocation to bonds this month by an average of 7 percentage points from April, according to a survey conducted by the lender, though they remain underweight overall. Cash levels, by contrast, fell to the lowest in almost three years.

Companies Respond

Some companies have responded to the demand for duration, with health care firm Merck & Co. Inc. this week offering a 30-year security, the longest-dated euro corporate bond since 2021. The benefit for corporates is that rates on longer-term European debt are below those on short-term credit, allowing treasurers to lock in lower borrowing costs.

“Companies are taking advantage of the low prevailing credit spreads in the market and locking in that risk premium for their borrowings,” said Luca Bottiglione, head of European credit research at Zurich Insurance Group AG.

The Merck deal helped boost the average tenor of corporate bonds issued in the region’s publicly-syndicated debt market this month to about 7.6 years — the longest since October 2021, according to data compiled by Bloomberg. The data tracks euro, pound and dollar sales in the region and excludes perpetual and hybrid notes.

“Corporations might be finding a sweet spot in the markets right now,” said Althea Spinozzi, head of fixed income research at Saxo Bank AS. “They can lock in the lowest yields on the yield curve, while a substantial number of investors, eager to speculate on an aggressive rate-cutting cycle, are willing to extend duration.”

What to Watch

• About $25 billion of US high-grade bond sales are expected next week, with most likely front-loaded ahead of the Memorial Day weekend.
• In Europe, 64% of professionals surveyed expect over €30 billion ($32.6 billion) of sales in the coming week.
• In the US, Federal Reserve minutes due May 22 are expected to shed light on policymakers’ thinking on supply-side factors aiding disinflation.
• North of the border, April CPI data from Canada — out May 21 — is set to show ongoing disinflation while data due May 24 is expected to show a decline in April retail sales.
• In the UK, CPI readings due May 22 are likely to show price gains headed back toward target.
• For an in-depth look at the data and events around the world that could impact markets in the coming week, see the Global Economy Week Ahead from Bloomberg Economics.

Week in Review

• It’s turning into a sellers’ market once again in leveraged finance, with all that implies, including an asset-sales revival on the horizon and investors so willing that risk management becomes a lesser priority.
• Buying debt sold by the lowest-rated…