(Bloomberg) — Bets on long-term Treasury bonds have backfired as the US economy continues to strengthen, but payday is coming for those brave enough to stick to their guns.
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That’s the view of Sebastian Mullins of Schroder Investment Management who says signs of weakness are emerging in the US economy despite the recent string of positive data. He is collecting bonds from Australia and Europe while looking for an entry point to buy long-term treasuries.
“You have this illusion of money because things cost more, people spend more. In real terms, things lag,” said Mullins, Australian head of the multi-asset division at Schroders. “We’re starting to see some cracks in the labor market, but the consumer is the key to A big limit on whether or not the US rolls over. So we’re watching that closely.”
Betting on long-term Treasuries is risky as strong retail spending and a resilient jobs market suggest the US economy remains on a solid footing. The Fed has also signaled its openness to more rate hikes, raising the stakes for those betting that policymakers will have to start easing next year.
Mullins co-manages two of Schroders’ Sydney-based business portfolios, which oversees A$5 billion ($3.2 billion) in multi-asset strategies in Australia.
He is not alone in predicting that the world’s largest economy is heading for a hard landing. Jupiter Asset Management and Vantage Point Asset Management have the same opinion and recent movements in the US bond market confirm this view.
Yields on the 30-year Treasury rose to 4.42% on Thursday, the highest level since 2011, as traders began to internalize the idea that US interest rates could remain high for longer. Bloomberg’s US Treasury Gross Return Index is down 1.7% so far in August, on track for its biggest monthly drop since February.
US retail purchases rose 0.7% in July after upward revisions in the previous two months, while the unemployment rate unexpectedly fell to 3.5%, one of the lowest readings in decades.
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The heavy supply pipeline and Fitch Ratings’ move to downgrade its US credit rating fueled upward pressure.
“Looking at things today, you probably want to buy more term in the portfolio with that view of a recession,” Mullins said.
He also keeps cash on hand to buy an approaching pullback in stock markets, but currently uses options to manage macro risk and volatility in stocks – seeing range trading as a more viable strategy.
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