Long-Term Bonds Surge As Investors Pile Into Safe Havens

The revival of a risk-off bias in global markets this month has been a boon to long-term bonds. Although every corner of the US fixed-income market has been rallying this year, the latest surge in long-term maturities stands out, based on a set of exchange-traded funds.

Long-term corporates, in particular, are now the top year-to-date performer in 2019 by a substantial margin through yesterday’s close (May 29). Vanguard Long-Term Corporate Bond (VCLT) is up 10.0% so far this year. That’s comfortably ahead of the second-best performance so far in 2019 for US fixed income: junk bonds. SPDR Bloomberg Barclays High Yield Bond (JNK) is up 7.9%.

Another difference between this year’s performance leader and its runner-up: VCLT has been on a tear in recent days while JNK has stumbled. Indeed, Vanguard Long-Term Corporate Bond (VCLT) has posted gains in each of the past six trading sessions, lifting the ETF to a record high (on a total-return basis).

JNK’s modest decline of late still leaves it near its all-time high (after factoring in distributions). But in the current risk-off climate, along with rising worries about US economic weakness and relatively low yield spreads, the possibility of further declines for JNK isn’t easily dismissed.

Note, too, that iShares 20+ Year Treasury Bond (TLT) — the third-strongest year-to-date performer — has also rallied sharply this month.

The catalyst for the renewed appetite for safety is the escalating US-China trade conflict, which is expected to be a significant headwind for the global economy.

“A trade war is now everyone’s base case,” says Peter Tchir, head of macro strategy at Academy Securities. “The reality of a trade war is finally sinking in. Little or no progress seems to be occurring. If anything, both sides seem to be digging in their heels.”

The latest news: China is reportedly taking the battle up a notch on the soybeans front. According to Bloomberg: “China, the world’s largest soybean buyer, has put purchases of American supplies on hold after the trade war between Washington and Beijing escalated, according to people familiar with the matter.”

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