According to Goldman Sachs, here is where major investors are hiding away amid tumultuous markets.
According to a Goldman Sachs executive, investors have flocked into short-term US government bonds to ride out the turmoil produced by a spike in longer-term yields.
According to Lindsay Rosner, head of multi-sector investment at Goldman Sachs asset and wealth management, an auction of 52-week Treasury notes at a 5.19% rate this week was 3.2 times oversubscribed, the strongest demand of the year.
“They’re saying, ‘I’m now being afforded a lot more yield in the very front end of the curve in government paper,'” Rosner told CNBC over the phone. “That is really where you’re seeing investors flock.”
The transaction is an important tool for institutions and rich investors to respond to the recent rise in long-term interest rates that has roiled markets. For weeks, the 10-year Treasury yield has been rising, reaching a 16-year high of 4.89%. Friday, after the September employment data revealed that firms were still aggressively recruiting. According to Bloomberg, investors put more than $1 trillion into new T-bills in the fourth quarter.
According to Rosner, the strategy capitalizes on the assumption that interest rates would remain higher for a longer period of time than markets anticipated earlier this year. If that feeling remains, she believes that longer-term Treasuries, such as the 10-year, would provide higher returns next year as the yield curve steepens.
“You get to collect a 5% coupon for the next year,” she told me. “Then, in a year, you may have opportunities [in longer-term Treasuries] at more than 5% in government securities or potentially in [corporate bonds] that are now properly priced.”
“You could then get a double-digit yield, but be confident about valuation, unlike now,” she went on to say.
While 10-year Treasuries have fallen in recent weeks, Rosner believes that other fixed-income instruments, such as investment-grade and high-yield bonds, have not completely reflected the change in rate assumptions. This makes them a lousy deal for the time being, but it may open up chances in the future.
According to Ben Emons, head of fixed income at NewEdge Wealth, the turbulence that has hit investors of longer-dated Treasuries in recent weeks has professional managers decreasing the average length of their portfolios.
“Treasury bills are in high demand,” he told reporters. “Anyone who needs to manage duration in their portfolio can use the 1-year T bill.” That is what BlackRock does.
is doing, and that is what I am doing.”