Eric Sanders, director and portfolio manager at Payden & Rygel, said investors
are no longer just asking whether the Fed will hike, but how much further
tightening is already priced into bonds. Markets continue to price the
possibility of additional Fed tightening, broadly consistent with Payden &
Rygel’s view; if anything, market-implied tightening is slightly above their
forecast. That raises the risk-reward appeal of the short end of the U.S.
Treasury curve: 2- to 3-year Treasury yields sit materially above cash and
3-month T-bill rates, offering a meaningful buffer against further rate rises.
Sanders added that further yield increases would not necessarily push bond total
returns into negative territory.
