No End In Sight For US Government Bond Rally?

No End In Sight For US Government Bond Rally?

almost 4 years ago1 min

Mentioned in story

With the US government poised to borrow record sums to support businesses and individuals during the coronavirus outbreak, you might expect the price of the country’s bonds (a.k.a. Treasuries) to fall. But a new report from fund manager Guggenheim argues that ongoing demand from Federal Reserve (Fed) bond-buying programs will more than match this new supply.

Prepare for a debt deluge
Prepare for a debt deluge

What does this mean?

“Interest rates are not likely to skyrocket anytime soon despite massive Treasury issuance,” Guggenheim reckons. In fact, the asset manager – which was bearish on the outlook for bonds for many years – forecasts that rising Treasury prices will push yields below zero for the first time in 2021, even as the government splurges on unemployment benefits and corporate bailouts 🤑

Holding out for a zero 'til the end of the night
Holding out for a zero 'til the end of the night

Why should I care?

If you invest, there’s a good chance you own at least some US debt – after all, the classic “balanced” portfolio contains 40% bonds. And if Guggenheim is correct, you can expect those bonds to gain in value. But even if you don’t own any Treasuries, their yield is considered the “risk-free rate” against which the performance of all other investments is measured, so should always be on savvy investors’ radar.

Treasuries have already been the top-performing asset class this year, particularly when considered on a risk-adjusted basis that takes into account the magnitude of price swings. Which makes Guggenheim’s bullish call all the bolder.

Source: Goldman Sachs
Source: Goldman Sachs

Still, Guggenheim’s prediction of sub-zero yields is at odds with betting in the futures market and forecasts by investment banks including Goldman Sachs. And Guggenheim points to several risks to its outlook – from COVID’s slowing spread leading to a sharp economic recovery, to investors losing faith in the effectiveness of Fed policy altogether.

Goldman Sachs predicts Treasury yields will rebound
Goldman Sachs predicts Treasury yields will rebound
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