Bloomberg reports that the most crowded trade in income investing is at risk of overheating. Long-bonds have been big winners YTD, but according to Bloomberg that trend may be at risk of reversing. Even if you aren’t interested in taking your investment advice from a news outlet, the risk in long-bonds far outweighs the opportunity.
The hottest craze in fixed income is at risk of overheating.
A headlong rush into higher-yielding, long-term bonds in recent years has created one of the most crowded trades in financial markets. Investors seeking relief from central banks’ zero-interest-rate policies have poured into government debt due in a decade or more, swelling the amount worldwide by a record $733 billion this year. It’s more than doubled since 2009 to about $6 trillion, data compiled by Bloomberg and Bank of America Corp. show.
Now money managers overseeing more than $1 trillion say the case for owning longer maturities — stellar performers for most of 2016 — is crumbling. There’s mounting evidence that inflation is starting to stir, just as some central banks hint that higher long-term interest rates may be the key to boosting growth. That’s troubling because a key bond-market metric known as duration has reached historic levels, and the higher that gauge goes, the steeper the losses will be when rates rise.
Rates are rising from a very, very low base, which means there’s lots of downside and very little upside” for bond prices, said Kathleen Gaffney, a Boston-based money manager at Eaton Vance Corp., which oversees $343 billion. She runs this year’s top-performing U.S. aggregate bond fund and has reduced duration and boosted cash. “If you don’t know how to time it, and I certainly don’t, you just want to get out of the way.