PGIM's Gregory Peters states that the return of the 30-year US Treasury yield above 5% is prompting investors to reassess what level constitutes an attractive entry point.
Peters anticipates that yields for US Treasuries and 30-year corporate bonds will rise significantly further, suggesting that a 5.5% yield would be a "pretty good" level for long-term government bonds.
In an interview, this co-chief investment officer of PGIM Credit noted that increased bond issuance related to artificial intelligence and hyperscale cloud providers, coupled with rising US Treasury issuance, means "this is the beginning, not the end." He added that pressure will be seen on the long end of the yield curve.
Peters believes this represents only the early stage of the market re-evaluating and repricing what is considered attractive for long-term yields.
He indicated that the trend towards a steeper yield curve will gain further momentum over the coming quarters and years, with increased debt levels pushing long-term yields higher.
Peters is a member of the US Treasury Borrowing Advisory Committee, which meets quarterly in Washington to discuss the outlook for the nation's financing needs.
Peters is most optimistic about the middle and short end of the US Treasury yield curve. As yields rise, investors will benefit as these bonds' durations shorten and they become shorter-term instruments.
He remarked, "You don't need to take duration risk, and being in the front end of the curve is a completely different situation than being in the long end."
Ahead of the Federal Reserve's June meeting, PGIM had already shifted its expectation from rate cuts to three 25-basis-point hikes this year. The hawkish stance emphasizing price stability from Chairman Kevin Warsh at the June meeting surprised the market.
Currently, traders using OIS futures contracts are pricing in approximately 0.35 percentage points of cumulative Fed rate hikes this year, with the first 25-basis-point increase anticipated in October.
Peters concluded, "We are very close to a rate hike. Whether it starts in July is up for discussion."
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