“Of course there are arguments for the opposite. As we noted for ourselves, inflation is rising, yields are still historically low, and the Fed has slowly pulled back from its emergency programs aimed at lowering bond yields. All true. However, since the yield on 10-year US Treasuries is 2%, the reason for buying high-quality, longer-term loans increases. “
The pension manager highlighted a number of reasons why this is the way forward. First, higher government bond yields, if sustained, can limit some assets and slow economic activity. The market has shown in the last six weeks that not only long bonds are suffering from rising interest rates – a large number of “long-term assets” are vulnerable.
He explained, “In a world where you can get back the cost of buying a house from 10 years of rental income, for example, house prices are not particularly sensitive to 10 year interest rates, which move from 1% to 2%.
“However, if it takes 50 years of rental income to recoup your expenses, then shifting longer-term returns to 2% is big. And 3% rates in this situation are a disaster. The consequential effects of higher interest rates can therefore be lower prices for some properties and businesses, and this can ultimately limit the scope for increasing returns. “
Castle also argued that sentiment has turned rather lopsided and, in this case, one-sidedly bearish and “almost no Bond bulls left”. With such a consensus, the market could be prepared for a result that the participants are not currently expecting.