After eight consecutive Fed rate hikes, investors finally have an alternative to risky assets: USD cash. Treasuries will follow.
TINA, the well-known acronym for ‘there is no alternative’, has been widely used to justify moving into risky assets. In other words: the only way to make decent returns is, it was thought, to take on additional risk. But these days, there is an alternative: USD cash. After eight consecutive Fed rate hikes in the past three years, US cash is emerging as an attractive asset class. The flipside, however, is downward pressure on bond returns. We see this downward pressure on bond returns as just a temporary setback which ultimately creates a good buying opportunity for US bonds.
In recent years, the Fed has carefully guided the market through quantitative tightening and multiple rate raises. This has taken place against a favorable backdrop of positive but not exceptional economic growth, improving but below target inflation, and quantitative easing programs by other central banks.
The Fed’s ‘better safe than sorry’ approach and a market that continued to lag the central bank in pricing in rate hikes created a highly supportive environment for financial markets. But as things stand now, we think we are moving towards a different phase of the cycle. This is illustrated by factors such as US growth, which accelarated to an annualized rate of 4.2% in the second quarter of 2018.
Inflation is also currently above target, while unemployment is far below its natural rate. And if that isn’t enough, the US administration is pursuing an extremely procyclical policy that includes substantial tax cuts and deregulation. As a consequence, the US is facing the exceptional situation of rising budget deficits and accelerating economic growth – something we normally only see when the country is at war.
From both a policy and an economic perspective, we think that higher rates are warranted. To make things worse, there are developments that could tip the balance of supply and demand for US bonds towards supply.
The policy of the US government is putting pressure on budget deficits across the board. These deficits need to be funded, so bond issuance should increase. Unfortunately, this will happen at a time that the demand for these bonds is likely to waver. We will have passed the peak of quantitative easing by the ECB and the BOJ, and the Fed will accelerate the pace of its balance-sheet wind down. This will release the global bond market from the grip of the central banks.
Another compounding factor is the flat US yield curve. This makes it less appealing for non-US residents to buy US bonds on a hedged basis. Hedging the currency risk almost completely wipes out the advantage of higher US rates – unless, that is, investors believe that the positive difference in rates outweighs the higher volatility of their portfolios.
In the Trump era, everything is extremely politized – a factor that also needs to be taken into account. The US president has complicated the job of the Fed by publicly announcing that he was “not thrilled” and “should be given some help” by the central bank. “Every time we do something great, he raises the interest rates,” said the president, adding that Mr. Powell “almost looks like he’s happy raising interest rates.”
This pressure won’t however keep the Fed from hiking rates at a modest pace. But it will err on the side of caution. As a consequence, the bond market will tighten and the US yield curve will steepen – basically doing the job for the Fed. The bond market vigilantes will stage a comeback as the bond market awakes from its Fed-induced coma.
We have yet to reach a peak in long-term yields. Throughout the cycle, central banks have been very transparent about their actions. This has enhanced the effectiveness of these actions as market participants have had time to adjust and stay ahead of the game. Given where we are in the cycle now and the steady ascent towards 3% of the federal funds rate, which is widely regarded as the neutral rate, we think that uncertainty will grow among market participants as forward guidance from the Fed recedes.
All of this means that US Treasuries are not yet a good alternative for risky assets. However, as we highlighted in our general view, we believe the market may have two faces in 2019. If this happens, market participants would do well to move into Treasuries at some time next year. Tightening at the middle and long end of the yield curve will be carried over to the short end: the Fed will hike rates above neutral.
This could spark fears of a recession. In such an environment, we expect Treasuries do to well. Given their attractive starting yields, we can finally say that the TINA story is over.
当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。
商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会