By Jamie McGeever
ORLANDO, Florida (Reuters) -Stick it out, double down, or cut your losses?
This is the dilemma many fund managers are facing regarding the bond portion of their portfolio as the final quarter of a potentially historic year for U.S. Treasuries gets underway.
Treasuries are on track to record a rare hat trick and post annual losses for the third year in a row, something that has never happened in the history of the U.S. Republic, according to Bank of America, citing data going back to 1787.
Treasury bond indexes are down as much as 2.5% this year, not a huge move and most of it has come since Federal Reserve policymakers published their upwardly revised median policy projections on Sept. 20.
For an investor with a typical portfolio weighted 60% stocks and 40% bonds, these losses are more than offset by double-digit equity returns. Analysts at Truist calculate a 60/40 portfolio using the S&P 500 and Bloomberg U.S. Aggregate Bond Index is up around 7% so far this year.
But relative to expectations in January, owning bonds this year has been disastrous. Hot on the heels of the worst year ever for Treasuries in 2022 — the ICE BoFA U.S. Treasury Index plunged 13% — this was meant to be 'the year of the bond'.
It hasn't panned out that way. The two-year Treasury yield recently hit a 17-year high of 5.20% and the 10-year yield on Tuesday climbed above 4.75% for the first time since 2007 as investors adjust to the dawning reality that policy will remain restrictive until inflation is back down at the Fed's 2% target.
But the slide in bond prices has made the 'risk/reward' of holding bonds much more tempting. The equity risk premium, the compensation investors demand for holding 'riskier' stocks over 'safer'
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