Top US bond managers betting bond market still has room to run

US bond fund managers are betting that the steep gains in Treasuries over the last month are here to stay.

Yields on the benchmark 10-year Treasury rate have dropped to near 2.10 percent after rising as high as 2.55 percent as recently as May 2 as fears of escalating trade wars and slowing global economic growth have spooked equity markets and sent investors to the safety of bonds. Bonds yields fall as security prices rise, leaving investors with capital appreciation gains.

But instead of seeing the recent rally as just a fear trade, fund managers from firms including BlackRock Inc, Wells Fargo Asset Management and Sierra Investment Management say they are still buying Treasuries in anticipation of additional interest rate cuts this year by the Federal Reserve to try to revive inflation amid a slowing economy.

The near $16-trillion sector produced a total return of 2.35 percent in May, its strongest monthly showing since August 2011, according to an index compiled by Bloomberg and Barclays. Long-dated Treasuries generated a stellar 6.7 percent return, their juiciest performance since January 2015.

“We haven’t gotten the inflation engine going and I don’t think we will,” said Margie Patel, a senior portfolio manager at Wells Fargo Asset Management. “It’s a horrible outcome for fixed-income investors who have been spoiled for 30 years and now they’re facing a complete yield drought that will probably get worse,” she said, adding that a fall in the yield of the 10-year Treasury to 1.5 percent  over the next year “would not be out of the question.”