Inflation Trade in Treasuries Is Spent, Janus Henderson Says

(Bloomberg) -- Investors betting on a U.S. recovery might be assuming too much in the way of price increases, according to Janus Henderson.

Growth will pick up, says the global head of fixed income, Jim Cielinski. But investors anticipating a rebound in inflation may want to look at the Japanese experience, where massive government spending with low interest rates led to a collapse in volatility rather than surging yields, in his view.

Against this backdrop, Treasuries look attractive as the benchmark 10-year yield approaches the 1.25%-1.5% range, Cielinski said in an interview. Inflation-linked bonds are past their best performance and the trade betting that the yield curve will steepen is “long in the tooth.”

The call by Janus Henderson, which manages about $105 billion of fixed-income assets, is another sign of the division on Wall Street over the strength of the so-called reflation trade. While JPMorgan Asset Management says Treasury 10-year yields could almost double as inflation picks up, others such as Hoisington Investment Management Co. disagree.

The U.S. benchmark was at 1.10% Friday, having eased back from a peak of 1.19% earlier this month.

The combination of strengthening growth and tame inflation is a boon for risk assets, according to Cielinski. He favors high-yield corporate bonds, mortgages and asset-backed securities that didn’t enjoy the same runup in prices as high-grade credit.

“Let’s remember that slightly higher inflation, as long as it doesn’t lead to monetary policy tightening, tends to be quite good for markets,” he said. “If you can keep inflation under control, but it’s moving higher, that is supportive of risk assets.”

And while he thinks that the Federal Reserve could start trimming its bond purchases next year, Cielinski isn’t concerned that it would spark a repeat of the volatility seen in 2013, as policy makers have learned how to prepare the market.

“They are going to be extremely careful to avoid a taper tantrum, and that’s why I see longer yields anchored somewhat,” he said.

(Updates with current U.S. 10-year level in fifth paragraph.)