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Fixed Income Hasn't Peaked: Schroders

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Is the bond market peaking?

Probably not, according to several fixed income experts at Schroders, which recently hosted a roundtable discussion on fixed income for reporters in New York City.

“I don’t think fixed income’s peaked,” said Andy Chorlton, head of U.S. multi-sector fixed income at Schroders.

He added, though, that he thinks risk assets may have peaked for this cycle.

“I think the search for yield is peaking in terms of risk assets,” Chorlton said.

According to Chorlton, Treasuries at least below 5 years look like a “decent value” following the selloff that started late last year.

In contrast, spreads across sectors are expensive even after the small correction in February. The S&P 500 fell into correction territory — down more than 10% — in early February.

Chorlton explained to ThinkAdvisor in an email that “fixed income in general hasn’t necessarily peaked given the cheapness in short Treasuries, more risky fixed income sectors like credit, maybe have.”

Earlier this month, the U.S. 10-year Treasury yield had climbed to four-year high of 2.95% earlier in the month after the strong January jobs report. The 10-year Treasury note again jumped to around 2.917% Tuesday afternoon after Jerome Powell, the new Federal Reserve chair, said the central bank could raise rates more than three times in 2018.

Karl Dasher, CEO and co-head of fixed income in North America at Schroders, told press that he thinks 3.25% is a good ceiling on the 10-year rate.

“My personal view is that it would be really hard for 10-year bonds to move aggressively beyond about 3.25 without the feedback loop driving risk assets into a more negative area and therefore driving back down bond prices,” Dasher said.

Meanwhile, Goldman Sachs isn’t too concerned over the recent move bond yields, according to a CNBC report.

CNBC reports that economist Daan Struyven wrote in a note to clients Saturday that he expects the recent rise in rates to be “well absorbed” for two reasons. According to Struyven, treasury yields have risen quickly over the last two quarters , with the 10-year yield up 70 basis points in 5 months.

“First, our analysis shows that the increase in rates over the last two quarters mostly reflects positive growth news. Second, the overall growth impulse from financial conditions remains positive, as equity prices have surged and the dollar has weakened over the last year,” Struyven wrote.

On the other hand, Bill Gross has made it clear that he thinks a bear market in bonds is already here.

In January, he said that the bear market started in July 2016 when the 10-year Treasury yield fell to 1.45%. The July bottoms signified the end of a bull market that began 35 years earlier, according to Gross.

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