Investors are now piling into short-term US government debt to wait out the volatile period caused by a spike in long-term yields, according to a senior Goldman Sachs executive.
Lindsay Rosner, head of cross-asset investing at Goldman Sachs, said this week's auction of 52-week notes at 5.19 percent was 3.2 times oversubscribed, the highest demand so far this year.
"Investors are saying, 'I'm getting a much higher yield at the top of the curve,'" she said in an interview. Short-term government bonds, primarily the 1-year Treasury bill, are really where investors are flocking to."
The recent spike in long-term Treasury rates has roiled markets, and investing in short bonds is becoming a mainstream response for market investors. Over the past few weeks, the yield on the 10-year Treasury note has surged at an alarming rate. The yield on the 10-year Treasury jumped to 4.89%, its highest level in 16 years, after the nonfarm data beat expectations on Friday.
Data show that investors poured more than $1 trillion into Treasury bills in the last quarter.
According to Rosner, the strategy takes advantage of the assumption that interest rates will be higher and last longer than markets were expecting earlier this year. If that sentiment holds, she said, longer maturities such as the 10-year should yield better next year as the yield curve steepens.
"If you buy a 5 percent bond that matures next year, you have a chance to buy a long-term bond that matures at more than 5 percent next year," she said. Longer-dated bonds will then be more reasonably priced, with yields even in double digits."
Rosner also said that while the 10-year Treasury has plunged in recent weeks, other fixed-income instruments, including investment-grade and high-yield bonds, have not fully reflected the change in interest-rate assumptions. This makes them a bad trade at the moment, but could create opportunities in the future.
Ben Emons, head of fixed income at NewEdge Wealth, also said the turmoil of recent weeks has hurt holders of long-term Treasurys, leading professional managers to shorten the average maturity of their portfolios.
"There is so much demand for short-term Treasuries that anyone who needs to duration manage their portfolio will buy the one-year Treasury, which is what BlackRock does and what I do." 'he said.