Value & Income

U.S. Treasury yields finally pack a punch

After the Fed raised interest rates to a 22-year high in July, U.S. Treasuries may be offering their best opportunity in years, according to Fidelity's Jeff Moore.

  • Following the U.S. Federal Reserve hiking its benchmark interest rate 11 times since March 2022, U.S. Treasuries are offering among their highest yields in years and look particularly compelling from a risk/reward standpoint, says Fidelity Portfolio Manager Jeff Moore.
  • "Although we've historically looked to corporate bonds and other credit markets to add yield within the portfolio, these days we're particularly excited about the value opportunity we see in risk-free U.S. Treasury securities, given the combination of their relatively tight credit spreads and high income," explains Moore, who co-manages Fidelity Advisor® Tactical Bond Fund with Michael Plage.
  • This multi-sector bond strategy, launched in early 2022, gives the managers flexibility to allocate across the full spectrum of the debt market, including investment-grade, high-yield, and leveraged loans, to take advantage of wherever they see opportunity.
  • Given the favorable risk/reward opportunity present in U.S. Treasuries these days, Moore explains that they have recently been capitalizing on bouts of volatility in that market, while de-emphasizing corporate bonds, which they consider less attractive, based on tight credit spreads.
  • Moore points out that the Treasury yield curve remains inverted, meaning that yields on short-term bonds are higher than their long-term counterparts, a direct reflection of the Fed's aggressive campaign to hike rates to cool the economy and bring down high inflation.
  • He clarifies, however, that historically the yield curve hasn't stayed inverted for long. That's because investors typically demand more income in exchange for taking on more duration (interest rate) risk. Still, Moore feels a changing yield curve may present an upcoming investment opportunity.
  • One way the inverted yield curve could move to a typical, positively sloped one, Moore contends, would be if the economy experienced a hard landing, typically characterized by an uptick in unemployment and mounting investor fear of a recession, a situation he does expect at some point, though not necessarily in the near term.
  • Moore acknowledges that he and Plage may be a little early to the Treasury trade, but for good reason: "History has shown us that the yield curve has inverted gradually but steepened rapidly. Therefore, if a softening economy leads to a sudden steepening of the yield curve, we'll need to be early enough to avoid missing out on the market shift. Simply put, by the time market conditions start to reflect a new economic reality, it will most likely already be too late to take advantage of."
  • Against this backdrop, the co-managers have positioned the fund for the environment they anticipate, remaining patient as they await the opportunity to capture what they believe could be significant potential value.
  • "We're quite excited, particularly about prospects for the bond market and U.S. Treasuries, which represented about 44% of the portfolio as December 31, because we anticipate significant upside and limited downside, given where U.S. Treasury yields are these days," concludes Moore.
  • For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.

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