When to ditch cash and invest in US bonds? Institutions reveal "buying point"

Since 2021, the losses in the U.S. bond market have been severe, almost wiping out any additional returns compared to cash markets over the past 10 years. The Bloomberg U.S. Aggregate Index, which includes U.S. Treasuries and investment-grade corporate bonds, has brought investors a 15% return over the past 10 years through February of this year, while the return on equivalent cash-like U.S. Treasuries (with shorter terms) has been 14%. Over the past 1 year, 3 years, and 5 years, investors have seen higher returns by holding U.S. Treasuries. The poor performance of the bond market mainly occurred in 2022, when the Federal Reserve began a series of aggressive rate hikes, leading to a record 13% drop in the Bloomberg benchmark index. The current yield on 3-month U.S. Treasuries is around 5.4%, more than 100 basis points higher than the 10-year U.S. Treasury. With the Fed not easing its policy, cash returns will continue to outperform bonds. Following stronger-than-expected economic and inflation data, traders have pushed back expectations for the first rate cut from March to June and reduced bets on the size of this year's rate cut. The challenge currently facing investors is when to shift towards longer-term bonds. Timing is crucial: currently, holding cash easily outperforms U.S. bond investments, but shifting to bonds too late means missing out on the opportunity to lock in yields at levels not seen in nearly 17 years. Cash rates remain high, and the motivation to hold bonds and take on risk remains low. For example, for William Eigen, the fund manager of the $9.5 billion JPMorgan Strategic Income Opportunities Fund, the choice is easy: about 60% of his fund is in cash. He says that even if the Fed were to cut rates by 100 basis points, the yield on short-term U.S. Treasuries would still be higher than longer-term bonds. Therefore, the motivation to take on interest and credit risk in fixed income markets remains low. Eigen says of his cash investments, "I've never done so little and gotten so much reward in my career. His fund has gained about 0.9% this year, while the Bloomberg bond index has dropped 1.7% during the same period. Over the past five years, the fund's return has been 11%, more than three times the 3% gain of the benchmark index. Until 2021, bond investors enjoyed a 40-year bull market, as during the pandemic in 2020, the yield on the 10-year U.S. Treasury plummeted from near 16% in 1981 to less than 1%. In contrast, for most of the time since the global financial crisis, cash was seen as "trash" because the Fed kept borrowing costs at near-zero levels. Over the 10-year period ending in 2020, the annual return on the Bloomberg bond index was 3.8%, while the annual return on U.S. Treasuries was 0.7%. With the outbreak of the pandemic, the situation changed as surging inflation prompted the Fed to raise its target rate to a range of 5.25% to 5.5%, the highest since 2001. The bond market collapsed, and cash once again became an investable asset class. Last year, investors poured over $1 trillion into money market funds, which invest in cash equivalents like U.S. Treasuries and commercial paper. Since the beginning of this year, an additional $172 billion has flowed in, bringing the total assets of these funds to over $6 trillion for the first time. Investors are waiting to re-enter the arms of medium-to-long-term U.S. bonds; is a 4.5% yield on the 10-year Treasury a "buying opportunity"? Ed Al-Hussainy, global rate strategist at Columbia Threadneedle Investments, warns that the risk-return profile of hoarding cash is no longer as attractive as it was during soaring inflation and Fed rate hikes. Al-Hussainy points out that since the Fed has hinted that rates have peaked, the marginal risk of investing in cash funds today is different. He said, "There's a lot more reinvestment risk here. Extending investment duration makes sense." Al-Hussainy notes that with the yield on the 10-year U.S. Treasury doubling over the past two years, U.S. bonds are attractive and have more room to absorb potential capital losses. Data shows that these bonds would need to rise by about 60 basis points to 4.8% to offset annual coupon payments. He said, "Initially, yields will have to be much higher. It gives you a better cushion." For those who are confident that the eventual trajectory of rates is downward, the time to increase exposure to the world's largest bond market may be ripe. Managers from PIMCO, T. Rowe Price, DWS Investment Management Americas, and BNY Mellon Wealth Management see this opportunity. They believe that if the yield on 5-year to 10-year U.S. Treasuries further rises to 4.5%, it will be an extremely attractive buying opportunity. Michael Cudzil, portfolio manager at PIMCO, says that with inflation rates sharply decreasing from their peak last year, "4.5% is like the 'new 5%'," making it a good time to buy. Catrambone also favors mid-term U.S. bonds, especially since the recent rise in yields on the 5-year and 10-year U.S. Treasuries has comfortably surpassed the market's long-term expectation (indicated by forward rates) of 3.5% for the Fed's next easing cycle. T. Rowe Price portfolio manager Steve Bartolini is content playing the "waiting game" and remaining "patiently extending duration." A rise in the yield on mid-term U.S. bonds above 4.4% will prompt them to buy and shift strategies from their current position of reducing positions. Bartolini said, "The level around 4.4% in the middle of the yield curve is more interesting because it implies two rate cuts are priced in." Such a shift may weaken investors who still hold about $6 trillion in money market cash, prompting them to turn to bonds.Sinead Colton Grant, Chief Investment Officer of JPMorgan Chase, said: "We see the reduction in interest rates as a new opportunity for clients holding cash to invest in bonds. You will see volatility, but at this level and near this level it is attractive, so yes, you may see yields slightly higher than this level, but relative to the levels of the past 10 years, they are still quite attractive at this level.""Bonjour, comment a va?" "Hello, how are you?"