Barclays Plc has identified a structural shift in the buyer base for U.S. Treasuries, with mutual funds, households and other private investors now driving demand—a change the bank links directly to 30-year yields reaching their highest levels in nearly two decades.
Long-maturity U.S. yields climbed last week to levels not seen in almost 20 years, driven in part by concerns that the Federal Reserve is delaying action on inflation. Fed Chair Kevin Warsh's refusal to detail how policymakers will manage price growth has fueled market unease, with some interpreting the stance as a dovish hold with questionable credibility, according to Jon Hill, head of U.S. inflation market strategy at Barclays.
Hill expects the market to price greater inflation risk into the yield curve, widening breakevens—the gap between nominal and inflation-linked bond yields—and lifting inflation-linked bonds above conventional ones in performance.
Separately, HSBC's Dhiraj Narula reiterated a recommendation for long-maturity U.S. bonds that protect against price growth, citing concerns about the U.S. central bank's longer-run commitment to inflation control.
Market data supports the divergence. A Bloomberg gauge tracking inflation-linked debt has advanced 0.3 percent this year, while an index of conventional sovereign bonds has lost 0.7 percent over the same period.
The real yield on 30-year U.S. Treasury Inflation Protected Securities currently stands at 2.93 percent, after peaking at 3.04 percent Friday—its highest level since 2008.
Despite those inflation concerns, breakeven rates remain near their lowest level in a year, suggesting the market is underpricing the risk of future price increases, according to some analysts.
Jorge Garayo of Societe Generale SA said inflation-linked bonds offer value at current real yields. He said the chances of a comprehensive Middle East peace settlement are highly unlikely, and that low breakevens show the market is complacent about the risk of higher energy prices feeding into broader prices and wages.
Kevin Kidney of True Potential Investments LLC has increased his firm's inflation-linked sovereign holdings to approximately 20 percent of its flagship multi-asset fund range. Kidney said he believes central banks are willing to accommodate higher inflation than they publicly communicate.
