Investors lured by high yields could be making a mistake if they are buying bonds these days, according to Strategas.
Yields have been climbing since the Federal Reserve began raising interest rates last year. The 10-year Treasuryrecently topped 5%, a level not seen since 2007, and is now hovering around 4.9%. Meanwhile, investment grade bonds are yielding even more, with the ICE BofA U.S. Corporate Index’s effective yield sitting at 6.3%. Bond yields move inversely to prices, so when prices fall, yields move higher, and vice versa.
Investors are closely watching the Fed, which is expected to announce its latest interest rate decision Wednesday. The market is pricing in more than a 98% certainty the central bank will leave rates unchanged, according to CME’s FedWatch tool. During their September meeting, officials indicated there would be one more hike in 2023 and then two cuts in 2024.
Strategas is of the mindset that until the market suggests otherwise, the trend in yields is up. In other words, it isn’t banking on bond prices having hit a bottom.
“For all anyone knows, that expiration date may be sooner than later, but what we’re struck by is how eager many are to call the top in yields — it’s not the behavior we’d expect during the worst bear market Treasuries have endured in more than 40 years,” Chris Verrone, the firm’s head of technical and macro strategy, said in a note Monday.
“Bear markets end with indifference, apathy, and neglect,” he added.
In fact, not many investors made real money playing against the trend in the four decades when yields were falling, Verrone pointed out.
“So even if yields are close to putting in some cyclical top, will real money be made betting on rates down if the secular trend is still higher?” he said.