With the Federal Reserve effectively pausing rate hikes for the time being, some analysts are forecasting a move to bonds. Bob Michele, JPMorgan’s CIO for global fixed income, is one of them.
While the Fed mentioned that more rate hikes are ahead, they could come at a less aggressive pace. This will allow investors to lock in the higher interest rates on bonds now ahead of an eventual rate cut, whenever that comes.
“If we are right and we’ve seen the last Fed rate hike and the market starts pricing in rate cuts and they start cutting rates, then those cash returns will start to evaporate,” Michele told Bloomberg, noting that with a strategic move to bonds, “you will have locked in not only the carry but will also get some capital appreciation.”
Furthermore, Michele can see the U.S. economy heading into a recession in the next 12 months with unemployment rising. This could provide another catalyst for bonds as investors seek safer confines to park their money.
“Unemployment at 4.5% is recession, I don’t think there’s ever been a jump of 1.1% in unemployment and the NBER (National Bureau of Economic Research) hasn’t come in and said we’re in recession,” Michele said. “So the Fed is predicting recession there.”
With the recent rate pause, bets are now being placed on September for the benchmark rate to hit its zenith. From then on, Michele sees the Fed cutting rates.
“We have never gone from the last rate hike to recession without the Fed cutting rates before then,” Michele said. “If everything we are seeing is telling us a recession by year-end, I am still sticking with September as the first rate cut.”
2 Options for Bond Bulls
If investors start piling into bonds, traders can play the short-term moves on leveraged Treasury ETFs for maturities past 20 years and within seven to 10 years. For longer maturities, consider the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF), which seeks 300% of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index.
For upticks in Treasury bonds, traders can use the Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD). TYD seeks 300% of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. The index is a market value-weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than seven years and less than or equal to 10 years.
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