Following stellar bond market returns in the first quarter, institutional investors are now adjusting fixed income portfolios to reflect their views on the likelihood of a U.S. recession, according to a new report from State Street Global Advisors. (Spoiler alert: Investors are not yet betting on a recession.)
The global quarterly report Bond Compass leverages analysis from State Street Global Markets showing bond flows and holdings indicators from the first quarter of 2019, taken from a data set of $10 trillion of fixed income assets under custody and administration at State Street.
Investors began the year with near neutral returns in Treasuries, but have rapidly chased returns this quarter. The report finds that demand for Treasuries surged into the top quartile as investors chased returns, but they did so primarily at the front end of the curve.
“Few expected central banks to capitulate on monetary tightening quite as quickly as they did in Q1,” the report states. “As a consequence, long-term investors were not prepared for the stellar bond market returns that followed.”
According to the report, aggregate demand for U.S. Treasuries hit a 12-month high at the end of March .
The report notes this demand has not come entirely at the expense of riskier fixed income instruments. While demand for U.S. mortgage-backed securities and investment grade corporates remained robust, high yield bonds did see some outflows in the quarter, according to the report.
The report also looks at the demand for U.S. Treasuries across different maturity buckets.