Lombard Odier Turns Bullish on Treasuries After Five-Year Hiatus
(Bloomberg) — Switzerland’s Lombard Odier Investment Management has turned overweight US Treasuries for the first time in at least five years, seeing the higher yields as increasingly attractive compared to stocks.
Florian Ielpo, head of macro research at the CHF 367 billion ($443 billion) investment firm, said LOIM’s multi-asset mandates, including the LPP30 fund, earlier this month deployed some of their cash holdings into 10-year Treasury futures. The firm now has a 2% overweight position, about half the size of its equity overweight.
The shift may appear contrarian, given investor concerns over governments’ swelling debt burdens, sticky inflation and the prospect of further interest-rate increases. Those worries drove this week’s global debt selloff, which lifted 10-year US Treasury yields above 5%, near three-decade highs, while 30-year rates touched 5.44%, the highest since 2004.
Ielpo noted, however, that Treasury yields are now more or less on par with the earnings yield on US equities, making government bonds attractive on a relative basis. For a Switzerland-based investor, the position offers an added benefit — substantial carry, given the gap between rock-bottom Swiss interest rates and higher-yielding US bonds.
“We are at the moment where basically bonds are cheap and equities are comparatively expensive,” Ielpo told Bloomberg News. “Normally, this leads to a mean reversion.”
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Bonds will benefit once geopolitical tensions in the Middle East ease and Big Tech’s artificial intelligence-linked borrowing binge stabilizes, he said, describing the position as a play on “the stabilization of the long end, with a very big carry.”
Ielpo’s views remain unchanged after the latest selloff, which he attributes to resilient US economic activity, rather than the likelihood of higher interest rates.
In contrast to money markets which are pricing more than three Federal Reserve rate increases in the coming year, Ielpo expects only one more move following last month’s quarter-point rate hike.
LOIM had steered clear of Treasuries in recent years due to surging bond volatility following the Covid pandemic, but began normalizing exposure as those swings gradually eased, Ielpo said.
While this week’s selloff has sharply boosted Treasury volatility, levels are nowhere near the peaks reached during the post-pandemic inflation shock. As of now, the average 90-day volatility of 10-year bonds stands near decade lows, data compiled by Bloomberg show.
Ielpo said there’s a possibility that high interest rates slow the US economy, but any subsequent decline in yields would still reward bondholders.
Even so, he’s skeptical yields will return to pre-pandemic lows anytime soon, arguing that the US needs to keep rates attractive enough to draw foreign capital into its debt market.
“If you expect that rates will fall back to 3% tomorrow morning, you could be very much disappointed,” he said.
–With assistance from James Hirai.
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