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Long On Short Bonds

Richard Turnill profile picture
Richard Turnill

Key points

  • We see higher yields as an opportunity for investors to add exposure to shorter-term U.S. Treasuries.
  • Global stocks fell on fears over U.S.-imposed trade tariffs, while remarks from the Fed chair cemented the idea of at least three 2018 rate hikes.
  • China's National People's Congress is expected to rubber stamp a broad government overhaul that further centralizes power.

A rapid rise in short-term yields in U.S. government debt is restoring their appeal. This marks a major shift away from the post-crisis era of near-zero yields on such instruments. The upshot: Investors now have a viable alternative to cash with yields finally above inflation levels.

U.S. Treasury yield cushion by maturity, 2014-2018

U.S. Treasury yield cushion by maturity, 2014-2018

Sources: BlackRock Investment Institute, with data from Thomson Reuters, March 2018.
Notes: The yield cushion is defined as the percentage point rise in yield that would cause a price decline large enough to wipe out one year's worth of income. Short, intermediate and long maturity Treasuries are represented by the Bloomberg Barclays 1-3 year, Intermediate and Long U.S. Treasury Indexes.

The steady increase in shorter-maturity bond yields provides a thicker cushion against concerns around further rises in interest rates. The light green line in the chart above shows interest rates would need to jump more than one percentage point to wipe out a year of income in the two-year Treasury note. This is nearly double the cushion on offer two years ago - and far larger than the thin insulation provided by longer-term bonds today. We believe the short end offers relatively compelling income along with a healthy buffer against the prospects of further increases in yields.

The fruits of normalization

The rise in short-term U.S. rates reflects multiple market crosscurrents. The U.S. Treasury market is catching up with the Fed's own projection of rate hikes in 2018. This reassessment

This article was written by

Richard Turnill profile picture
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock Investment Institute (BII). He is responsible for ensuring we create, coordinate and communicate value added market and investment insights and deliver them consistently to our clients and client facing professionals. Prior to his current role he was Chief Investment Strategist for the Alpha Strategies Group, responsible for developing strategic plans around the Alpha Strategies product range and the positioning of Alpha Strategies products both internally and externally. He has also served as Head of the Global Equity team within the Fundamental Active Equity division of BlackRock's Portfolio Management Group. He was responsible for leading the team which manages large cap global equity portfolios. Mr. Turnill's service with the firm dates back to 1996, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. At MLIM, he led the global equity team and was responsible for overseeing all aspects of the investment process. Earlier, Mr. Turnill was a group economist in MLIM's Central Strategy Group, head of MLIM's asset allocation and economics team, and was the Chief Investment Officer for the Merrill Lynch Global Private Client discretionary business in EMEA Pacific. Prior to joining MLIM in 1996, Mr. Turnill worked in the international division of the Bank of England as an economic advisor and the global economics team of Paribas Capital Markets in London. Mr. Turnill earned an MA degree in economics from Cambridge University in 1991.

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Comments (2)

KYSANMAN profile picture
Take a look at floating rate loans too. BSL!
Dale Roberts profile picture
Thanks Richard, I too am long on short bonds with your Canadian 1-5 year corp ladder, CBO on the TSX. But it stinks, ha. Here's my article, What's That Smell? My bonds.


Any suggestions? I am getting a big tired of falling unit prices and falling yield. :) Did I get what I asked for?

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