So far this year, rising prices of long-term U.S. Treasury bonds and other high-quality fixed income investments have surprised many investors, who were girding themselves for higher interest rates and lower bond prices.
In the June issue of The Cerulli Edge, analysts at Boston-based Cerulli Associates have been tracking this trend. According to the publication, investors who expected the Federal Reserve’s slow retreat from massive bond-buying to raise yields have found instead that 10-year Treasury yields have fallen 60 basis points year-to-date through May 31, 2014.
During the same time-period, the Barclay’s U.S. Aggregate Bond Index rose 3.8% and fixed income strategies that were benchmarked to that index saw net asset inflows, not the expected outflows.
Cerulli analysts point to the changing supply and demand in Treasuries as a possible explanation. Net issuance of Treasury debt was down 60% in 2014 when compared to May last year, while global demand for government debt reached $1.2 trillion, or double the current supply.
In addition, the analysts write, de-risking corporate pension plans and other institutional investors have locked in 2013 equity gains by moving assets into U.S. Treasury debt and other high-quality fixed income. What’s more, life insurers, holders of $2.6 trillion in long-term bonds, added about $52 billion in high-quality bonds to general account investment portfolios last year, Cerulli said, citing data from A.M. Best.
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