With or without a recession, yields on long-term U.S. government debt look attractive, said Molly Schwartz, portfolio manager at Western Asset Management, on Thursday in a talk on fixed-income investing opportunities.
With yields now around 4%, Schwartz said 10-year Treasury notes can “provide good, stable income” if the U.S. economy avoids a recession, but also downside protection in the event of something “more negative happening,” she said.
Her thinking is that despite the Treasury yield curve’s sharp current inversion, a reliable harbinger of past recessions, yields on longer Treasury bonds point to investor optimism about the economy’s future over the long run.
The 2-year Treasury yield
TMUBMUSD02Y,
was at 4.93% on Thursday, near its highest since 2007, while the 10-year
TMUBMUSD10Y,
was at 4.08%, at last check, according to FactSet.
The 10-year Treasury is the “most closely watched barometer in the world,” Schwartz said, because it’s an overall marker of investor sentiment, but also a benchmark for U.S. mortgage rates and for the overall economy.
She pointed to a “consumer that’s still resilient” and positive U.S. economic growth, despite the Federal Reserve’s rapid pace of interest rate hikes in the past year to bolster her argument for why investors in long-term Treasurys have been pricing in a less gloomy economic outlook.
The U.S. stock market has stumbled in recent sessions, and bond yields have climbed, on fears that inflation may prove harder to bring lower than initially anticipated, which could force the central bank to jack up the fed-funds rate higher than initially anticipated.
The market’s current expectation is for a roughly 5.5% to 5.75% peak rate this summer, according to the CME FedWatch Tool.
Schwartz, however, sees fixed-income as already having already shouldered much of the damage of the Fed’s first 450-475 basis points of rate hikes since last March.
“Yes, it’s time to start dipping your toes in and buying bonds,” she said.
Stocks were mixed on Thursday with the Dow Jones Industrial Average
DJIA,
clinging to a 0.2% gain, the S&P 500 index
SPX,
down 0.3% and the Nasdaq Composite Index
COMP,
off 0.5%, according to FactSet.
