Treasuries Yielding 4%+ Earn Investors $900B, Demand Soars

Key Takeaway

• US Treasuries now offer significant income, with investors earning nearly $900 billion last year, a figure set to rise as over 90% of Treasuries yield 4% or more.
• Economic stability and delayed Fed rate cuts contribute to the attractiveness of Treasuries as a reliable source of income.
• Record investments in money-market and bond funds, along with direct Treasury sales to individuals, indicate strong demand for fixed-income assets.

Fixed Income Renaissance

For the first time in decades, fixed income investments are living up to their name, offering substantial returns to investors. This shift is largely due to benchmark rates in the US soaring from 0% to over 5% within two years. Last year, investors earned nearly $900 billion in interest from US government debt, a figure that's expected to rise as over 90% of Treasuries now carry coupons of 4% or more. This marks a significant departure from mid-2020, when only 5% of Treasuries offered such yields. Anne Walsh of Guggenheim Partners Investment Management highlighted the positive impact of higher yields, stating, "With the help of our friends at the Fed, they did put the income back in fixed income."

Economic Trends and Fed's Stance

Recent economic indicators suggest a complex landscape for interest rates. Inflation remains close to the Federal Reserve's 2% target, delaying expectations for rate cuts to the latter part of the year. The economy's resilience, despite a cooling labor market, suggests that any future rate reductions by the Fed may be minimal. Fed Chair Jerome Powell's recent comments have reinforced a cautious approach, with traders now anticipating just two quarter-point cuts by year-end, a significant adjustment from earlier predictions of up to six cuts.

Surging Demand for Treasuries

The resurgence of interest in Treasuries is evident in the record assets of money-market funds, which reached $6.1 trillion last month, and the inflow of $300 billion into bond funds in 2023. Direct sales of Treasuries to individuals have also seen a notable increase. This renewed interest is partly due to the higher yields now offered by Treasuries, making them an attractive option for investors seeking stable returns. Dan Ivascyn of PIMCO noted the broad implications of the reset in yields for the investment landscape, emphasizing the value of bonds compared to stocks.

Challenges and Opportunities Ahead

Despite the positive momentum, the bond market faces several tests, including upcoming auctions of $125 billion in Treasury securities. These auctions will gauge investor appetite for longer-dated debt amid concerns over inflation and government fiscal policies. The market's adjustment to nearly two full rate cuts this year reflects growing speculation about the Fed's policy direction. However, persistent inflation and the potential for increased auction sizes pose challenges to the long-term appeal of bonds.

Street Views

• Anne Walsh, Guggenheim Partners Investment Management (Bullish on fixed income):

  "With the help of our friends at the Fed, they did put the income back in fixed income. And fixed-income investors, we get to reap the benefits of higher yield. That’s a good thing."

• Blake Gwinn, RBC Capital Markets (Neutral on US economy and interest rates):

  "Nobody is focused anymore on what could go wrong if the wheels come off with the economy. And every month that goes by is another month that a cut didn’t happen."

• Dan Ivascyn, Pacific Investment Management Co. (PIMCO) (Bullish on bonds vs stocks):

  "We’re seeing far more inquiries for fixed income than we’ve seen in the last almost 15 years... why am I making it so complicated when I can get 6, 7, 8% from bonds? So it’s opening up a whole new buyer base."

• Matt Eagan, Loomis Sayles & Co. (Optimistic about return to normalcy in bond markets):

  "It seems like going back to the future — a little bit back to some normal times... It’s quite a big turnaround."