Yields Suggest Greenspan `Conundrum' Redux, PGIM'S Schiller Says

  • Rising interest rates aren’t a ‘bond-bearish recipe,’ he says
  • Ten-year Treasury yield is ‘right where it should be’

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PGIM Fixed Income’s Erik Schiller said investors can hold Treasuries with confidence because the recent decline in yields shows that bonds will retain their value even as the Federal Reserve lifts interest rates.

“That is not a bond-bearish recipe from our vantage point,” Schiller, the company’s head of developed-market interest rates, said Thursday on Bloomberg Radio.

He likened current markets to 2005, when long-term yields kept falling even as the central bank raised borrowing costs. The divergence was described by then-Fed Chairman Alan Greenspan as a “conundrum,” a reference that Schiller highlighted Thursday. Greenspan later attributed declining bond rates to economic stability, expectations of low inflation and the fact that global savings were exceeding investment.

PGIM Fixed Income, which oversees more than $650 billion, has been saying for months that investors may be overestimating the prospects for economic growth and overlooking opportunities in the bond market. PGIM’s Greg Peters said Feb. 7 on Bloomberg Television that he was “much more skeptical” than the market about the idea that yields would continue to climb.

Yields on 10-year Treasuries jumped from 1.85 percent before Donald Trump was elected president in November to about 2.4 percent at the time of Peters’s interview. His remarks were well-timed, as yields were about 2.15 percent as of 11:10 a.m. in New York. Bond prices climb when yields fall.

“From our view, actually the 10-year yield is about right where it should be,” Schiller said Thursday. “Government bond yields particularly in the U.S. actually are pretty well supported.”

Inflation Data

He cited signs that inflation may be decelerating. Core consumer prices last month were up just 1.7 percent from a year earlier, the lowest since May 2015, Labor Department figures showed Wednesday.

PGIM is the third-party, asset-management operation of Newark, New Jersey-based insurer Prudential Financial Inc. The unit counts 23 of the largest 25 corporate U.S. pension plans among its clients, according to the company’s website. PGIM Fixed Income’s largest allocation is to corporate debt, and it the business also holds more than $100 billion of government securities.

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