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With rising yields, financial managers are starting to rethink government bonds

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News Tech: A glimmer of hope shines through yet another gloomy day on Wall Street: Treasury yields at decade highs are now luring large money managers from Amundi to BlackRock Inc. on the belief that the asset class would provide the necessary hedging in the upcoming downturn.

Short-term US yields are trading around 4% for the first time since 2007 as markets plummet ahead of Wednesday’s Federal Reserve meeting, where officials are anticipated to raise rates by 75 basis points for the third consecutive meeting. The highest benefits relative to equities in more than a decade are being offered by fixed income at the same time.

The nascent change in the financial environment may soon provide solace to traders shaken by the record selloff in the biggest bond market in the world this year.

Due to all of this, investors, including those at JPMorgan Asset Management, are becoming more positive about the global government debt, which, according to Bloomberg data, has lost roughly a fifth of its value this year.

The appeal of fixed income as a means of protecting against both an economic and stock market implosion is theoretically being revived by the central bank’s campaign to control inflation, even at the risk of igniting a recession.

According to Vincent Juvyns, global market strategist at JPMorgan Asset Management, “certain sections of the fixed income landscape are attractive again, and can provide diversification for portfolios at this juncture, which wasn’t the case a few months ago.” The much-maligned balanced investing techniques are expected to make a comeback as a result of higher starting yields, according to some sectors of Wall Street money management.

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Erin Browne, portfolio manager for multi-asset strategies at Pimco, declared that the 60/40 portfolio “is clearly not dead, in fact, following the repricing that we’ve seen this year across fixed income markets, we would argue that it’s very much alive.” Investment grade bonds, mortgages, and securitized products are just a few of the fixed income market segments that we now perceive to have genuine worth. As equities recover some of their losses from their June lows, the 60/40 strategy is on track to post its first quarterly gains of the year, according to a Bloomberg index. Vincent Mortier, chief investment officer of Amundi, Europe’s largest fund manager, argues that as the Fed makes progress in its fight against inflation, there is a general expectation that bonds will be better able to protect against stock market crashes.

Negative correlations are returning to the market, which implies that bonds will once more serve as diversifiers, he added. “It was the perfect storm in terms of returns,” he said. It’s time to revisit bonds, she said. According to the Wells Fargo Investing Institute, the following three to five years earned double-digit annualised gains during the majority of years when the 60/40 portfolio produced negative returns of more than 1%. For instance, the traditional portfolio recovered an average of 11.9% during the subsequent four years, from 2009 through 2011, following a loss of 21.6% in 2008.

From the perspective of overall returns, O’Connor remarked, “If you look at yields it’s beginning to look extremely appealing.” It’s possible that bonds will once again play a helpful function in a multi-asset portfolio following a repricing of short-term rate and inflation expectations.

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For instance, Paul O’Connor, the head of Janus Henderson’s multi-asset team for the UK, has been hedging a deeper equities decline by closing out an underweight position in fixed income. Bond bears are becoming less pessimistic in light of these investing lessons from history.

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