The turmoil in US bonds has led to a significant drop in US bond ETF prices. Fund managers suggest investors reduce their allocation in US bonds and diversify their portfolios globally to mitigate risks. While the Taiwanese stock market remains stable above 21,000 points, US bonds are caught in a sell-off due to worsening fiscal deficits, a weak dollar, and soaring yields. The downgrade by Moody's, moving the US sovereign credit rating from Aaa to Aa1, has compounded these pressures. As a result, all US bond ETFs have dropped sharply, with investors lamenting on forums about their losses, with remarks like they're "questioning life" due to the steep declines.
Trade Wars Induce an Artificial Bear Market, according to Cathay's Chairman Zhang Xi, who advocates for patience among investors during market fluctuations. He emphasizes that the short-term bond market turmoil is a natural phenomenon that requires a long-term perspective. Fund managers recommend timely reductions in long-term US bond ETFs, favoring a diversified bond investment strategy. For instance, the Yuanta 20-Year US Bond ETF (00679B) hit a low of 24.61 NT$ on the 22nd, a new low for this year, although it rebounded by 0.53% on the 23rd, this was insufficient to counter the 9.6% decline in the ETF over the past month and the over 10% drop since the beginning of the year.
Short-Term Shift to European Bonds Recommended, explains Liu Youci, manager of product development at Schroder Investment Trust. He analyzes that the US bond fluctuations involve not only trade wars and geopolitical issues but also credit rating agency downgrades, signaling investors to reassess their focus exclusively on US bonds. Over the past three years, the annualized volatility of 20-year US Treasury bonds has been 16%, compared to 8% for US investment-grade bonds and 7% for global diversified bonds during the same period. Typically, 20-year US bonds are better suited for short-term holdings to gain capital gains, while shorter-duration (like 10-year) bonds or globally diversified investments are more appropriate for retirees seeking stable income and cash flow.
Furthermore, the M&G Income Optimization Fund team believes that investor sentiment towards US Treasuries shifted after the election of President Trump as the market consensus for heightened risks emerged. For both stock and bond investments, they recommend adopting a flexible adjustment strategy, which includes reducing US Treasuries if afraid of short-term volatility and reallocating funds to European bonds, where countries like Germany and the UK offer government bond yields higher than the average of the past decade, indicating higher investment attractiveness.
Hope Remains for Future Rate Cuts, says Liu Youci, as the US continues its trade war with inflationary pressures and uncertain employment prospects, the Federal Reserve remains cautious about rate cuts, potentially foregoing them in the second half of the year, but a two-rate cut opportunity may arise next year. Meanwhile, Europe has already cut rates three times this year with Schroder Group projecting one more potential cut, suggesting a more lenient monetary policy environment in Europe amid fiscal stimulus policies in Germany, presenting better investment opportunities in European bonds. Cathay Investment Trust recognizes that the current US bond market is in a consolidation phase, acknowledging the predominantly negative news impacting Taiwanese investors more severely, and the additional pressures from exchange rate fluctuations. However, if we exclude currency factors, the overall bond market remains stable. Looking ahead, Cathay Investment Trust remains optimistic about gradual rate cuts in the US, with data from the CME FedWatch indicating that the Federal Reserve may cut rates again as early as September, with expectations for another two cuts by December, bringing the benchmark rate down to the target range of 3.75% to 4.0%, with further cuts anticipated by 2026.