T. Rowe Shorts Treasuries as Soaring Yields Upend Wall Street

Scott Solomon is betting a bond selloff that’s roiling bets on Wall Street has further to go.

(Bloomberg) — Scott Solomon is betting a bond selloff that’s roiling bets on Wall Street has further to go.

Solomon, one of many traders who has had to rethink his playbook this year, is now shorting 10- and 30-year Treasuries — a bet yields will keep rising as they catch up with the Federal Reserve’s rapid interest-rate hikes, and a shift from his position just weeks ago. 

“One thing we typically see in a cycle is that the 10 year and the terminal rate for the Fed typically get pretty close to one another,” said Solomon, an 18-year T. Rowe Price veteran in Baltimore. “And obviously the terminal rate’s going to be at least five and a half, whether or not they hike again in November.”

The Fed and markets may be realizing now that 10-year yields are “not sufficiently restrictive enough to slow inflation,” which means the selloff in Treasuries has scope to deepen, he said. T. Rowe Price managed $1.4 trillion of assets as of June 30.

As recently as June, Solomon said he had boosted exposure to 5-, and 10-year Treasuries and was using futures to bet that the spread from five-to-30 year yields will steepen.

But since then, the bears have been in the ascendance. The Fed raised its key rate to a range of 5.25% to 5.5% in July, and markets are pricing in further tightening by year-end. The benchmark 10-year yield rose to 4.686% on Thursday, the highest since 2007, while that on the 30-year bond touched 4.807%, the most since 2010. 

The move leaves the broad Bloomberg Treasury index lower by 2.5% for September, the market’s worst monthly performance in the past year. Investors in longer-dated Treasuries are having an even worse time; losses on US debt with a 10-year maturity or more are approaching 9% this year, on the brink of a third straight year of losses.

‘Recessionary Forces’

Solomon said he had started to favor bonds around May when “we felt like the recessionary forces were really starting to take hold.”

Instead, Treasuries sold off as inflation proved harder than expected to rein in. The selloff has seen T. Rowe Price’s dynamic global bond fund return a loss of 4.4% this year. The fund has still gained 1.8% over the past five years, beating 91% of its peer group. 

Read More: Bond Bulls Ignore Fed-Hike Noise and Keep Buying Yield Spikes

Solomon turned bearish again in August, when rising energy and food prices and a resilient jobs market convinced him economic growth was more robust than anticipated. That meant inflation was “going to be more difficult to control,” he said. 

Still, while Solomon is now more bearish, there are plenty of others in the market who are looking for Treasuries to rebound.

AllianceBernstein LP and JPMorgan Asset Management both say US government securities are a buy as the central bank nears the end of its tightening cycle. 

–With assistance from Michael Mackenzie.

(Adds firm’s assets under management in fourth paragraph.)

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