(Bloomberg) -- A sharp selloff in US Treasuries is helping the bond market’s valuations look more reasonable in the run-up to an unpredictable US election, according to BlackRock Inc.
David Rogal, portfolio manager at BlackRock’s fundamental fixed income group, said he likes intermediate bond yields after a resilient labor-market report upended market expectations for aggressive Federal Reserve interest-rate cuts. The yield on five-year Treasuries is now hovering around 3.9%, the lowest-yielding maturity on the curve.
“As we are going into the election, things look much closer to fair,” he said in a telephone interview on Wednesday. “We were more bearish on the front end of the curve recently and have pared that back.”
Investors are now able to lock in somewhat higher rates on intermediate bonds, while being less exposed to a “potential correction in term premium or longer duration bonds given the debt issuance story,” said Rogal, who is a member of the investment teams for BlackRock’s $40 billion Strategic Income Opportunities Portfolio and $20 billion Total Return Fund. Those funds have outperformed 85% and 35% of peers, respectively, over the past five years, according to data compiled by Bloomberg.
In the meantime, BlackRock is gaming out a busy period ahead that includes the Treasury’s refunding announcement, more economic data, the US elections and the Fed’s next policy meeting.
“The important thing to do is to have a plan, in terms of how to react to the different outcomes because the election is so close,” according to Rogal, who said the firm is evaluating a number of different scenarios. “There’s a large dispersion of opinions as to what the fiscal picture looks like under each candidate” and whether they operate under an aligned or split government.
Rogal said many in the market believe a scenario in which one party sweeps both the presidential and congressional election will lead to a higher deficit, which is overall negative for bonds.
Still, he warned, investors must be prepared. A sweep will lead to some uncertainty about which policies will come to fruition, he said, while a split government would come with uncertainty about compromises.
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