As June’s Federal Open Market Committee (FOMC) meeting approaches in the US, Andrea Iannelli, Fixed Income Investment Director at Fidelity International, outlines why US duration offers welcome protection for investors.
He comments: “US Treasuries posted another month of positive returns, helped by ongoing uncertainty over the shape and timing of any fiscal reform in the US and a series of disappointing data releases.
“At current levels, the “Trump trade” that saw 10yr US Treasury yields rise to 2.6% earlier this year has arguably been priced out. Although both valuations and market positioning have normalised in the last couple of months, we remain positive on US duration, as new headwinds to US growth, and yields, have begun to materialise.
“Inflationary pressures have diminished somewhat, although the recent extension of the OPEC production cuts could provide some short term support to commodity prices. Moreover, the “regulatory tightening” that is taking place in China, as well as lingering geopolitical risks, could potentially have a negative spillover on global asset prices.
“Despite the latest disappointing inflation numbers, the Federal Reserve will likely hike rates again at the June meeting, where they are also expected to provide further guidance around balance sheet reduction. We do not see this as a game changer for US Treasuries, and expect the Federal Reserve to take a very cautious approach, keen to avoid another “Taper tantrum”.
“With most risk markets trading at multi year highs, the room for error is limited and US duration offers a welcome protection in this environment.”
