Case for end to bond bull run historically strong – M&G’s Leaviss
August 9, 2021
By Aaron Saldanha
(Reuters) – The current economic environment offers the best chance bond bears have had in years to bet on a reversal in the multi-decade trend of bond yields falling, said veteran money manager Jim Leaviss, while advising traders to not “bet the farm on it”.
Huge U.S. fiscal stimulus and labor shortages could push up wages again, perhaps overcoming long-standing deflationary trends resulting from the rise of technology and globalisation’s impact on the price of goods and labor, said Leaviss, the chief investment officer of public fixed income at M&G Investments.
“The very long-term history, and trend for bond yields to fall, is still in place … you have to be really sure of yourself to bet on structurally higher inflation and bond (yields). If ever, however, it might be now,” Leaviss, who runs the widely read Bond Vigilantes blog, told the Reuters Global Markets Forum on Monday.
Government bonds have handed investors huge gains this year, rallying due to market uncertainty around COVID-19’s Delta variant and continuing bond-buying by global central banks, with even 10-year Greek bond yields reduced to close to 0.5% in the last month.
Citing the example of shorting Japanese government bonds – a trade often called the “widow maker” – Leaviss said the “increasing(ly) Japanese” features of the United States in terms of demographic outlook, debt burden and potential growth mean having the idea of U.S. Treasuries (UST) yielding zero in decades to come is not unfathomable.
Graphic: U.S. Treasury yield curve as at Aug. 9, 2021 and end-2020, https://fingfx.thomsonreuters.com/gfx/mkt/myvmnmlempr/US%20BMK.png
“Bond bubble! This has been talked about since I started in bond markets in 1992! And every year bond yields have fallen, pretty much,” Leaviss said in a message to the forum.
Leaviss is currently short duration in U.S. bonds for the funds he manages, but does not expect a big sell-off, adding he would buy some duration back if 10-year UST yields hit about 1.6%. He believes longer dated treasuries “look a bit expensive, but not fundamentally wrong.”
For the Fed, Leaviss expects the bank to announce plans to taper its massive bond-buying program in September, to take effect in November.
M&G managed 367.2 billion pounds ($509.67 billion) as of the financial year 2020’s end, across asset classes including bonds, real estate and stocks.
(This interview was conducted in the Reuters Global Markets Forum chat room on Refinitiv Messenger. Join GMF: https://refini.tv/33uoFoQ)
(Reporting by Aaron Saldanha in Bengaluru and Divya Chowdhury in Mumbai; Additional reporting by Supriya Rangarajan in Bengaluru; Editing by Patrick Graham and Devika Syamnath)