JPMorgan’s Bob Michele Says Hide in Cash With Treasury Yields Going Higher

(Bloomberg) — Bob Michele is hunkering down in cash as the Federal Reserve embarks on a tightening path that’s killing returns on bonds.

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J.P. Morgan Asset Management’s fixed-income chief says it’s a good idea to hide out in the most liquid assets from money market funds to Treasury bills as the U.S. central bank pares stimulus that underwrote asset prices through the pandemic.

In a list of five “realistic surprise predictions” with colleague Kelsey Berro, Michele says 10-year Treasury yields could rise to as high as 3% this year from 1.766% currently. The baseline trading range is seen at a more modest 1.875% to 2.375%.

The J.P. Morgan team also expects the Fed to raise rates four times in 2022 starting in March.

“Without the central bank purchases and with cash now offering some yield, let’s see how willing investors are to continue to purchase long-duration government debt at significantly negative real yields,” Michele and Berro wrote.

Michele also warns stock bulls risk overestimating the Powell Put, or the belief that the central bank will meet every potential market hiccup with easier policy.

“We disagree and think the Fed would let the markets drop much further if their primary concern was battling inflation,” Michele said. “The strike of any put is likely to be declines of 15%–30% in equities, not 2%–3%.”

Read more: Traders’ Best Friend — the Powell Put — Is Suddenly in Doubt

On an inflation-adjusted basis, yields are seen staying negative on government bonds that have posted fresh losses over the past week, coming off their first year in the red since 2013.

In turn, investors have been selling long debt en masse, yanking cash from the iShares 20+ Year Treasury Bond ETF at the fastest weekly pace since March 2020.

Michele, a four-decade market veteran, warned in October that surging inflation would force the Fed into faster rate hikes. Now both the Fed and the market are catching up. Swaps indicate the central bank’s target will be 88 basis points higher by the end of this year — seen as a sign the market is baking in three hikes, plus the possibility of a fourth in 2022.

Read more: Bob Michele’s New Fear Is the Fed Hiking Sooner Than Expected

Other potential surprises include a rate hike by the European Central Bank this year instead of 2023.

Overall, the duo remain risk-on, listing leveraged bonds and loans, hybrid bank debt and short-duration securitized credit among their top picks.

“As yields rise, asset valuations not just within fixed income but more broadly are negative impacted by higher discounting rates,” Michele said in an emailed response to questions. “Therefore, cash or money market funds will be most likely to have positive return while other asset classes deflate in value.”