While higher rates usually erode the value of long-dated debt more, expectations for only a gradual increase in yields and tepid inflation have investors such as pension funds seeking to put money to work in a low-return world.
“There is still really, really strong demand for Treasury bonds out there,” said Ben Emons, chief economist and head of credit portfolio management at Intellectus Partners. “There’s a mix of structural factors — from pension funds who remain underfunded — to global investors faced with low or negative yields abroad and given inflation is low. This would all be different if inflation was higher — but it’s not.”
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The amount of Treasury notes and bonds split into principal-and interest-only securities, known as Strips and a favorite of the asset-liability manager community, jumped to a record in August. Strips, short for separate trading of registered interest and principal of securities, have greater duration than their note and bond counterparts, meaning they suffer steeper losses when rates increase, and greater gains when rates fall.
“The pension and insurance industry is a bullet buyer — they never really relent on trying to get duration in all shapes and sizes,” said Thomas Simons, a money-market economist at Jefferies L.L.C. “This is not going to change anytime soon because of the global demographics and generally aging population. This demand does sort of put a cap on how far nominal 30-year yields can go higher.”
The 30-year Treasury bond yield trades at 2.89% , below the 3.49% level it averaged over the last decade, yet up from a record low set in July 2016 at 2.09% .
Investors are hedging the risk. A JPMorgan Chase & Co. survey shows investors have accumulated the largest short position relative to their benchmark since 2006.