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US Treasury yields have climbed to their highest level since 2002, drawing large asset managers such as Pacific Investment Management Company (PIMCO) and Morgan Stanley Investment Management toward a more optimistic stance. But Harry Richards, a bond fund manager at Jupiter Asset Management, still chooses to avoid US Treasuries. He believes US economic growth remains strong, demand pressure from the AI boom could continue to push prices higher, and bonds from economies such as the UK and New Zealand offer better investment opportunities.
Richards works at London-headquartered Jupiter Asset Management, which manages 75.9 billion pounds (about $101 billion) in assets, and he helps manage the firm's strategic bond strategy. He sold off nearly all of his US Treasury holdings around May this year and still lacks the willingness to buy back in. "If we ranked the markets that might perform best in the future, US Treasuries still would not rank near the top," Richards said in an interview. "US economic growth looks quite healthy, clearly better than many other developed markets right now."
High US Treasury Yields Prompt Investors to Reassess Allocation Value
US Treasuries have recently suffered a sell-off, pushing yields to their highest level since 2002. As bond prices fall and yields rise, investors have begun to reassess whether US Treasuries are now sufficiently attractive. Some large asset managers have already shifted to a more aggressive stance. PIMCO and Morgan Stanley Investment Management have recently both signaled bullish views on US Treasuries.
Richards, however, has not changed his judgment because of this. As of Friday, the yield on the 10-year US Treasury note was about 5.1%, below the 5.36% high reached earlier this month. So far this year, Bloomberg's index measuring the return performance of US government bonds has fallen 1.6%. Factors driving US Treasury yields higher include the US-Iran war pushing up energy prices and market expectations for Federal Reserve rate hikes. High energy costs could further increase inflation pressure, leaving US Treasury prices exposed to continued downside risk. Federal Reserve Chair Kevin Warsh, speaking in Bangkok on Friday, did not release any new monetary policy signal. He said the Fed will remain committed to achieving price stability and stressed that it will not prejudge decisions at future meetings. After his remarks, traders reduced bets on a Fed rate hike at the October 27-28 meeting: the probability fell from about 27% before the speech to less than 15%.
UK and New Zealand Bonds Look More Attractive
Compared with the US, Richards is more optimistic about the bond markets of Germany, the UK and New Zealand. He believes the US AI boom is increasing demand-side price pressure, while other economies do not have the same degree of AI investment theme. "The AI boom is clearly bringing some demand-side price pressure to the US," Richards said. "Other economies do not have the same AI theme, or at least not to the same extent."
He believes that if economies such as the UK and New Zealand slow further, market bets on rate hikes could quickly fade, or even shift toward expectations of rate cuts, thereby boosting bond demand. Compared with the US, economic growth in these markets is weaker, and labor markets in some countries are also under pressure. "Economic growth is weaker," Richards said. "In some of these markets the labor market is quite weak, such as the UK."
Performance of the Jupiter Asset Management strategic bond fund shows that, in the year through August 31, the fund returned 5.4%, above the 3.8% gain of its comparable benchmark. Over a three-year period, however, both the fund and the benchmark returned 20.8%. As US Treasury yields rise to high levels and some institutions begin to re-enter the market, Richards still focuses his investments on other developed economies. His judgment is that the resilience of US economic growth and the demand pressure brought by AI may make US Treasuries insufficiently attractive compared with markets such as the UK and New Zealand.
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