US bond investors seek safety amid uncertainty about Trump policies, Fed outlook
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – U.S. bond investors are gearing up for increased volatility and staying defensive in their portfolios amid uncertainty about the impact of the Trump administration’s policies and signs that the Federal Reserve’s interest rate cuts may be on a lengthy pause.
Portfolio managers continued to shy away from the long end of the U.S. Treasuries curve – from 10-year notes to 30-year bonds – ahead of a Fed policy decision this week. Many investors have also remained neutral relative to their benchmarks because of the cloudier interest rate path in 2025.
The U.S. central bank’s policy-setting Federal Open Market Committee is widely anticipated to keep its benchmark overnight interest rate in the 4.25%-4.50% range at the end of its two-day policy meeting on Wednesday. Fed Chair Jerome Powell will likely strike a cautious tone in his post-meeting press conference and keep the central bank’s options open to allow policymakers time to assess how President Donald Trump’s administration will reshape the fiscal landscape.
There is little urgency for the Fed to ease policy given the relative strength of the U.S. economy and the labor market. There is a risk that inflation, while showing signs of slowing, could reaccelerate due to broad tariffs that could be slapped on a slew of imported products along with deportations of undocumented aliens that could cause a spike in wage pressures.
“I would think that adding duration into the unknown is probably a bad idea, especially as we have no clue what’s going to happen over the next year,” said Byron Anderson, head of fixed income at Laffer Tengler Investments in Scottsdale, Arizona.
Investors were quick to extend duration, or buy longer-dated assets, last year when they thought the Fed had embarked on a deeper rate-cutting cycle. Longer-dated notes and bonds have historically outperformed shorter-duration assets like cash and Treasury bills in easing periods.
But in the last quarter of 2024, there was a retreat from long-duration positioning, analysts said.
This month, however, as the 10-year yield hit a 14-month high of 4.809%, active investors have added duration, according to the latest JP Morgan’s Treasury Client Survey, which showed the most net long positions since Dec. 2.
MORE NEUTRAL
The survey also showed that the number of bond investors with neutral positioning relative to their benchmark has also increased by three percentage points since the first week of January. Overall, the survey showed more neutral positioning than long.
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