- Investors have piled into short-term U.S. Treasury bonds to wait out the turmoil caused by a collapse in longer-term yields, according to Goldman Sachs’ Lindsay Rosner.
- An auction of 52-week Treasury bills at a rate of 5.19% this week was 3.2 times oversubscribed, the highest demand of the year, Rosner said.
- “They’re saying, ‘I’m now being offered a lot more yield at the extreme end of the curve in Treasuries,'” Rosner told CNBC in a telephone interview, referring to one-year Treasuries.
A Goldman Sachs Group Inc. logo hangs on the floor of the New York Stock Exchange in New York, USA, on Wednesday, May 19, 2010.
Daniel Acker | Bloomberg | Getty Images
Investors have piled into short-term U.S. Treasury bonds to wait out the turmoil caused by a decline in longer-term yields, according to a Goldman Sachs executive.
An auction of 52-week Treasury bonds at a rate of 5.19% this week was 3.2 times oversubscribed, the highest demand of the year, said Lindsay Rosner, head of cross-sector investing at Goldman Sachs Asset and Wealth Management.
“They’re saying, ‘I’m now being offered a lot more yield at the extreme end of the curve in Treasuries,'” Rosner told CNBC in a telephone interview, referring to one-year Treasuries. “This is really where investors are flocking to.”
Trading is an important way for institutions and wealthy investors to adjust to the rise in long-term interest rates that has rocked markets recently. The 10-year Treasury yield has been rising for weeks, hitting a 16-year high of 4.89% on Friday after the September jobs report showed employers are still hiring aggressively. According to Bloomberg, investors poured more than $1 trillion into new government bonds last quarter.
Rosner says the playbook takes advantage of the assumption that interest rates will be higher for longer than markets expected at the start of the year. If that assessment is correct, longer-dated Treasuries such as the 10-year Treasury note should offer better returns next year as the yield curve steepens, she said.
“You get a 5 percent discount for next year,” she said. “Then you might have a chance in a year [in longer-duration Treasuries] to more than 5% in government securities or potentially in [corporate bonds] which are now available at reasonable prices.
“Then you could get a double-digit return but be confident about the valuation, unlike now,” she added.
While 10-year Treasury bonds have plunged in recent weeks, other fixed-income instruments, including investment-grade and high-yield bonds, have not fully reflected the change in interest rate assumptions, according to Rosner. That makes them a bad deal right now, but could open up opportunities down the road.
Ben Emons, head of fixed income at NewEdge Wealth, said the upheaval that has hit holders of longer-dated government bonds in recent weeks has led professional managers to reduce the average duration of their portfolios.
“Treasury bills are in high demand,” he said. “Anyone out there who needs to manage the duration of their portfolio does so with the 1-year T-bill. That’s what BlackRock does, that’s what I do.”