(Bloomberg) — Bond investors who bet that central banks were too bullish in the face of recession risks should book profits now that this week’s rally has come to an end.
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JPMorgan Chase & Co. and TD Securities Inc. That’s the view of U.S. strategists, who say it’s time to liquidate long positions in Treasuries as the Federal Reserve could still tighten policy next week. US government bonds have risen in recent days as traders cut bets on a Fed rate hike amid turmoil in the banking sector.
“I don’t want to chase this bond rally, it seems silly,” said Amy Shea Patrick, head of income strategies at Pendle Group Ltd in Sydney. She went long on the bonds earlier this month, but is now skeptical of a rate cut. “I think the overarching theme is that I’m closer to neutral now. I’m taking the chips off the table, just taking the span across the curve.
Two-year Treasury yields have fallen more than 60 basis points this week, leading some investors to question whether the rally has outpaced fundamentals. A report on Tuesday showing US inflation remains high underscored the risks for traders who are betting that the Fed will hold off on its March 22 decision.
“We think the Fed is not deterred and we will continue to look for a 25-basis point hike next week and a final hike in May,” JPMorgan analysts led by Jay Barrie wrote in a note to clients. “We suggest profit taking on the remaining portion of the five-year note trade from 4.21% entry in the market.”
Some of the world’s top money managers said this week they held on to big profits after the collapse of a Silicon Valley bank rallied markets. Turmoil at Credit Suisse Group AG has added fuel to the rally in bonds, even as Chief Executive Officer Ulrich Korner said the bank’s financials were in good shape.
US five-year yields rose four basis points to 3.6% on Thursday from 4.35% on March 8, after Fed Chair Jerome Powell indicated he was open to the possibility of a half-point hike this month. The two-year yield climbed seven basis points to 3.96%, still down significantly from last week’s 5.08%.
TD Securities closed a 10-year Treasury trade it launched in February, when the yield was 3.77%, after falling to 3.46% this week, according to a note. The bank expected a fall in yields due to the possibility of a recession in the US.
“The events of the past week will likely extend ahead of schedule and worsen the severity of the downturn,” strategists led by Priya Mishra wrote in the note. “However, inflation is still high and we think the Fed will hike next week or at least commit to more hikes down the road.”
–With assistance from Joanna Ossinger.
(Updated yield in seventh paragraph.)
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