The ‘Sell Treasuries’ Cry Is Serious Now to Western Asset

Western Asset Management Co.’s Mark Lindbloom has an answer for investors wondering when they should sell their government bonds: That would be now.

Lindbloom has been doing just that over the past two weeks as a money manager helping to oversee Western Asset’s $10.2 billion Core Plus fund in the U.S., which has beaten 94 percent of its peers in 2014 on the back of the Treasuries rally. The fund started paring government-debt allocations last month after a year of boosting its holdings relative to benchmark indexes.

“We’re less enthused about that trade now,” Lindbloom said in a telephone interview yesterday.

Morgan Stanley has come to a similar conclusion. Strategists there said in a June 8 note that they’re now “maximum underweight Treasuries.” Leveraged investors, who typically use borrowed money to boost returns, have placed a record number of wagers that U.S. interest rates will rise, according to trading in CME Group Inc.’s Eurodollar futures.

The argument is that after this year’s 3.5 percent rally in government debt globally, the bonds just look overpriced.

Take, for example, yields on benchmark 10-year Treasuries. At 2.6 percent, they’re about two percentage points less than the average over the past two decades.

ECB Rally

The debt rallied last month in anticipation of the European Central Bank meeting on June 5, when policy makers cut rates in the region further. That benefit has run its course, Morgan Stanley strategists said in their note. Bank of America Merrill Lynch index data show Treasuries are on pace for their worst monthly performance since December, losing 0.8 percent so far in June.

Last month, Pine River Capital Management LP’s Steve Kuhn and Omega Advisors Inc.’s Leon Cooperman said they thought government bonds were overvalued and greatly preferred stocks.

Lindbloom, who also helps manage Western Asset’s $5.5 billion Total Return Unconstrained fund, said he expects a near-term selloff in Treasuries that will be relatively controlled. His funds still like longer-dated bonds, but have been selling notes with intermediate maturities.

If the consensus among Wall Street economists is correct, U.S. government-debt yields have to increase at some point this year. Perhaps that time has come.

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