The greater interest you’re getting on bonds also isn’t risk-free, as you’re still losing on the actual price of the bond. If you can’t hold a long-dated bond until maturity, you can take a loss on your position.
Treasury bonds are also still relative underperformers versus other sectors. For example, the tech-heavy Invesco QQQ ETF (Nasdaq:QQQ) — powered by AI stocks — has had returns of over 20% this year.
So does it make sense to buy into the bond selloff? The Wall Street Journal reached out to six of the world’s most powerful investment fund managers, including Bridgewater Associates founder Ray Dalio, with just that question. They all had different answers, but their insights may give you some ideas on where to put your investment dollars.
Tracking the trends
BlackRock’s CIO of Global Fixed Income, Rick Rieder, told the Journal that historical trends are on bond investors’ side. “People recognize that once you get the 10-year above 5%, you tend to make money,” he said, adding that he’s already begun adding some of these long-dated bonds to his portfolio.
Bryan Whalen, CIO of Fixed Income for TCW, points to factors including an eventual end to the war in Iran and the high concentration of debt in the hands of “interest-rate-insensitive” AI hyperscalers. He predicts bondholders will be rewarded for their patience.
Even relatively cautious investors like Pimco’s CIO Dan Ivascyn see high-yielding bonds as an opportunity. Ivascyn noted he sees signs of slowing in the U.S. economy due to higher yields but that sustained spending from AI companies, coupled with the homebuyers who already secured lower fixed mortgage rates, is likely to stave off a recession. If you take advantage of current yields, he noted, “You can build a 6% or 7% high-quality portfolio.”
Is the AI trade still alive?
Managers are hopeful for productivity gains from AI, and they note that the tech companies borrowing these billions of dollars have solid balance sheets.
But that doesn’t mean they’re all putting their money into large cap tech equities. Speaking on Big Tech stocks, Syzygy Asset Management’s founder Rob Arnott said, “I’m of the view that we’re looking at a bubble here.” Rather than piling into major indices like the S&P 500, Arnott says there could be opportunities in smaller companies poised for better growth.
There’s another potential way to gain from the AI trade without buying stocks at stretched valuations: Corporate debt. Franklin Templeton’s Global CIO for Fixed Income, Sonal Desai, is considering doing just that, arguing debt from hyperscalers like Meta (NASDAQ:META) and Amazon (NASDAQ:AMZN) is more attractive than long-dated bonds that could take a hit with future Fed rate hikes.
What to buy if bonds still scare you?
If you still aren’t sold on government or corporate bonds, you may want to listen to Dalio. He argues that ballooning deficits and yields will keep rising and put a damper on the global economy.
