The Wall Street Journal - 17.08.2019 - 18.08.2019

THE WALL STREET JOURNAL. ** Saturday/Sunday, August 17 - 18, 2019 |B13

poor returns from government

bonds going forward or you’re

going to make extremely poor

returns,” said Tristan Hanson,

a fund manager at M&G In-

vestments, who recommends

investors buy equities and

avoid bonds issued by Group

of Seven governments.

Some 13% of the £117.27 mil-

lion ($141.71 million) M&G Epi-

sode Macro Fund is placed in a

short bet against negative-

yielding German government

debt, Mr. Hanson said.

The rationale is that “there

is a limit on how far those

yieldscangoeveninanad-

verse economic scenario,” given

the European Central Bank has

set negative benchmark rates,

he said.

Other investors are now

paring back their bets on a

further drop in yields in the

U.S. They reason that many of

the risks weighing on the

global economy—including

trade tensions and uncertainty

over Brexit—could unwind

rapidly, sending yields higher.

Xavier Baraton, global chief

investment officer for fixed in-

come at HSBC Global Asset

Management, has been buying

Treasurys that mature in two

to 10 years. He is now betting

against comparable bonds that

maturein15to30yearsasa

form of “insurance” in case in-

vestors’ gloomy economic out-

look is overdone.

“The global economy—while

not in perfect health—is stable

and a global recession looks un-

likely anytime soon,” he said.

He contends that yields on lon-

ger-dated debt reflect the mar-

ket’s long-term outlook on the

economy rather than short-

term monetary policy.

The yield on 10-year U.S.

Treasurys has tumbled

to 1.54% from 2.03% at the

start of August, sending prices

on the bonds soaring. The

yield on U.S. 30-year debt has

dipped below 2% for the first

time, from 2.53%.

For now, the wagers that

yields could rise in the coming

months remain small, contrar-

Continued from page B1

Traders Bet

Bond Rally

Overdone

ian positions.

Taking a long position in

U.S. Treasurys was the “most

crowded trade” in the Bank of

America Merrill Lynch’s

monthly survey of fund manag-

ers in July for the second

monthinarow.Crowded

trades are ones that are so pop-

ular that any reversal of senti-

ment threatens to saddle recent

buyers with significant losses.

Paul Brain, head of fixed in-

come at Newton Investment

Management, a BNY Mellon

subsidiary, has been buying up

30-year U.S. and German gov-

ernment debt all year. But he

also put on bets against the

five-year debt in April and again

in May. His plan was to short

some part of the yield curve, to

make the most of a dip between

three and five years and a flat-

tening of the curve.

“If we don’t get a recession,

then the market has priced in

too much,” said Mr. Brain. “We

don’t want to bet everything

on just that one belief.”

Bryan Carter, head of emerg-

ing-market fixed income at BNP

Paribas Asset Management, has

been buying up sovereign debt

this year, taking large positions

in Ukraine and some other

lower-grade issuers.

But he has recently taken a

short position on eurodollar fu-

tures, which use the interest

rate on dollar-denominated de-

posits held in European banks

as a reference—a bet that

would make money if the Fed

delivers fewer rate cuts in the

next year than markets expect.

Jeff Keen, a director and

head of fixed income at Wa-

verton Investment Manage-

ment, has been buying put op-

tions on German government

bonds, which gives him the

right to sell the debt in future

atasetprice.Itis,hesays,a

“contrarian bet that things are

not quite as black and white as

the market might think.”

The yield on 10-year Ger-

man government bonds has

dropped to minus 0.71% from

0.24% at the end of December.

“In a normal kind of envi-

ronment, if we ever get back

to that, bonds should provide

a real return, which means

yields should be above the

policy target rate which is

2%,” Mr. Keen said.

—Pat Minczeski

contributed to this article.

Treasury yields by maturity Yields on U.S. Treasurys

*Most recent Fed rate cut †Upper level of target range

Sources: U.S. Department of the Treasury (yield curves); Tullett Prebon (yields); Refinitiv (rates)

MATURITY

The Federal Reserve

interest-rate benchmark

and implied yields on

related futures

The Deep Bend

Bond yields, particularly at the long end of the yield curve, have plummeted since the Federal

Reserve lowered rates by a quarter-percentage point, and more signals of an economic slowdown

have emerged. Also, futures’ pricing implies that the Fed will have to lower rates further to keep step.

Federal Reserve rate target†

Futures three months out

Futures 10 months out

Five-year

30-year

1m 2m 6m 1y 2y 3y 5y 7y 10y 30y

July 31*

Friday

3.0

1.0

1.5

2.0

2.5

%

2018 ’19

2.5

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

% 3.5

1.0

1.5

2.0

2.5

3.0

%

J FMAM J J A

haven assets, like gold, amid

renewed anxiety over slowing

global growth and a flare-up

in trade tensions.

The rally has also come as

the Federal Reserve shifted its

policy stance and cut interest

rates for the first time in a de-

cade.

Expectations of lower bor-

rowing costs tend to boost

gold, which struggles to com-

pete with yield-bearing assets

when rates rise.

Investors are continuing to

flock to the funds. About $2 bil-

lion has flowed into the SPDR

Gold Trust—the world’s largest

gold ETF—over the past month,

accounting for more than two-

thirds of its total inflows in

2019, according to FactSet.

They put an additional

$924 million into the iShares

Gold Trust in that span, repre-

senting more than half of its

2019 inflows.

Both ETFs have gained more

than 7.5% apiece over the past

month, versus gold’s 7.3% rally

and the S&P 500’s 3.8% decline.

Some analysts and investors

expect gold to continue mov-

ing higher in the near term, as

investors use it as a hedge

against economic uncertainty.

The price slipped 0.5% Friday

to $1,512.50 a troy ounce, after

hitting its highest level since

April 2013 a day earlier.

“This has been one of the

best environments for gold in

the past half-decade,” said

Ryan Giannotto, director of re-

search at GraniteShares.

“Lower rates, coupled with un-

certainty surrounding Fed pol-

icy, is going to continue to be

a positive for gold beyond the

immediate future.”

Shares of smaller gold min-

ers may offer more opportuni-

ties for investors compared

with their larger counterparts,

which are trading close to fair

values, according to analysts

at JPMorgan Chase & Co.

The firm raised its price tar-

gets this week on Agnico Eagle

Mines Ltd., Eldorado Gold

Corp., Franco-Nevada Corp.

and NovaGold Resources Inc.

Each of those stocks have ral-

lied at least 11% since mid-July.

Larger counterpart Barrick

Gold Corp. has also fared well,

with its share price climbing

16% in that span.

Gold exchange-traded funds

are regaining their luster.

Investors poured about $2.6

billion into gold-backed ETFs

in July, increasing their collec-

tive holdings to 2,600 tons—

the highest total since March

2013, data from the World

Gold Council show.

The price of the precious

metal has surged 18% over the

past three months and recently

eclipsed $1,500 a troy ounce

for the first time in six years.

Investors have flocked to

BYJESSICAMENTON

Global Jitters Send Investors to Gold Funds

MARKETS NEWS

Since 1965, the sector, on aver-

age, beat broader benchmarks

in the 12 months following

such an event. So far this year,

the S&P 500 is up 15%.

That history offers hope to

investors after yields on the

10-year U.S. Treasury notes

briefly fell Wednesday below

two-year yields. That type of

inversion, which had last hap-

pened in 2007, has been one of

the stock market’s most reli-

able signals of a recession

since 1978, and it has investors

and analysts alike scrambling

to rejigger portfolios in case

the economy starts sputtering.

Bank of America’s analysts

highlight Vanguard’s Informa-

tion Technology exchange-

traded fund for its low ex-

pense ratio and price

momentum. In addition, the

fund carries a lower exposure

to the beleaguered semicon-

ductor industry.

As one looks deeper into

tech, IT-services stocks have

fared the best, rising 32% this

year. That is no surprise as

several companies in the group

have reported some of the

strongest earnings results for

the second quarter. PayPal

Holdings Inc., for example, in-

creased earnings by 47% from

a year earlier, while Automatic

Data Processing Inc.’s profit

grew 22%. Both stocks are up

more than 26% on the year and

have mostly weathered the lat-

est bout of volatility.

But that performance

comes at a premium. IT-ser-

vices stocks look pricey, trad-

ing at 22 times earnings pro-

jected over the next 12

months, near the group’s high-

est levels in years and well

above the broader tech sector

and the S&P 500.

Only software stocks, which

have risen nearly 29% this

year, are more expensive, with

a forward-looking price-earn-

ings multiple of 24.

Among the cheapest, but

also the riskiest amid trade

tensions and signs of eco-

nomic weakness, are semicon-

ductor stocks. They trade at 14

times their earnings. Second-

quarter earnings have pulled

back about 28% from a year

earlier, and third-quarter earn-

ings could contract even more,

with analysts estimating a

30% pullback.

One bright spot is Nvidia

Corp. The chip maker reported

solid earnings thanks to a

boost from gaming and raised

its forecast for the year, send-

ing shares up 7.3% on Friday.

The stock is up nearly 20%

year-to-date and analysts at

Bank of America say the com-

pany has the potential to rise

an additional 41%.

Technology stocks are up
26% this year, and some Wall
Street analysts say the sector
is a good refuge following
worrisome signs from the
bond market.
But it all depends on where
in tech investors put their
money.
Tech stocks have a history
of outperforming the broader
market following a yield-curve
inversion, analysts at Bank of
America Merrill Lynch say.

BYMICHAELWURSTHORN

Bond Market Gives Cue for Tech Stocks

The precious metal’s price has risen 18% over the past three months amid signs of slowing economic growth and rising trade tensions.

MICHAEL DALDER/REUTERS

Gold Rush

Investors are pouring money

into gold-focused ETFs amid

concerns over global growth.

Net flows into gold exchange-

traded funds, monthly

Source: World Economic Council

$2

–2

–1

0

1

billion

Jan. April July

SPDR

Gold Shares

iShares

Gold Trust

Treasurys Fall After

Germany’s Report

U.S. government bond

prices fell Friday as investors

eyed how policy makers

around the world are approach-

ing signs of slowing growth.

The yield on the bench-

mark 10-year note rose, set-

tling at 1.540% from 1.534%

Thursday. The 30-year Trea-

sury yield was at 2.001%, up

from its record low of 1.985%.

Yields, which rise as bond

prices fall, climbed on a report

Friday that Germany may be

willing to increase govern-

ment spending if its economy

enters a recession. The coun-

try’s economy contracted in

the second quarter and some

economists predict it will

shrink again in the third quar-

ter, which would meet some

definitions of a recession.

The yield on 10-year Ger-

man government debt rose

Friday to negative 0.689%

from negative 0.693%.

European Central Bank offi-

cial Olli Rehn said Thursday

that the central bank should

consider at its meeting next

month a broad approach to

boosting growth. “It’s often bet-

ter to overshoot than under-

shoot, and better to have a very

strong package of policy mea-

sures than to tinker,” he said.

Investors are also looking

ahead to next week when

Federal Reserve Chairman Je-

rome Powell is scheduled to

speak at the central bank’s

annual retreat in Jackson

Hole, Wyo. Some investors

are unsure of how Mr. Powell

and other policy makers in-

tend to address the recent

escalation of trade tensions

between the U.S. and China.

Bonds have rallied since

the start of this month after

President Trump said he in-

tended to raise additional tar-

iffs on $300 billion of imports

from China. Since then, inves-

tor bets about how quickly

the Fed will move to reduce

rates have fluctuated. Federal-

funds futures on Friday

showed about a 20% probabil-

ity that the Fed will cut rates

by half a percentage point at

its September meeting, with

the remainder betting on a

quarter-point reduction.

—Daniel Kruger

A rare showdown between a
national-security panel tasked
with overseeing foreign-in-
vestment in U.S. companies
and a Russia-linked firm is
nearing a potential resolution.
The Committee on Foreign

Investment in the U.S., known
as Cfius, last year ordered a
private-equity firm with ties to
wealthy Russians to sell its
stake in a U.S. cybersecurity
firm called Cofense Inc. Amer-
ican officials had raised na-
tional-security concerns about
the amount of foreign money
invested in the private-equity
firm, Pamplona Capital Man-
agement , given the nature of
Cofense’s business.
BlackRock Inc.’s private-eq-
uity-funds arm has agreed to
take over Pamplona’s minority
stake in Cofense, said people
familiar with the talks. Under
the proposal, no money would
change hands now, with Pam-
plona being paid if shares of
Cofense are sold down the
road, some of the people said.
The proposed deal was sent to
Cfius for approval Friday,
some of the people said.
Representatives for Black-
Rock and Pamplona declined
to comment.
The unusual terms of the
deal would make it a rare in-
stance in which a sale ordered
by Cfius is structured to retain
economic interest for a seller.
The terms are intended to ac-
complish Cfius’s goal of limiting
foreign investors’ access and
sway over critical technology in
ways that could hurt the U.S.
Cfius and the trustee over-
seeing the sales process must
still approve the deal for it to
take effect. If they do so, the
deal could be announced as
soon as next week, some of
the people said.
Cofense simulates and de-
tects attacks transmitted via
email to help companies deal
with security threats. The
Leesburg, Va.-based firm
counts U.S. corporations
among its customers.
Pamplona was founded in
2005 by Alexander Knaster,
the former chief executive of
Russian bank Alfa Bank.
Wealthy Russians who have in-
vested in Pamplona funds in-
clude Mikhail Fridman, among
others, according to a person
familiar with the matter.
A spokesman for Mr. Frid-
man has previously told The
Wall Street Journal Mr. Frid-
man understood Cfius to be
concerned about the general
level of foreign money in Pam-
plona, and not specifically
with Mr. Fridman’s involve-
ment.
It couldn’t be determined
Friday how Pamplona’s share
of future gains might be dif-
ferent from what it would be if
Pamplona were to hold on to
its stake. But the deal is in-
tended to strip Pamplona and
its foreign-fund investors of
any ability to influence the
company, according to people
familiar with the matter.
Cofense was valued at around
$400 million in a deal an-
nounced in February 2018, when
BlackRock acquired it with a
group of investors that included
Pamplona. Recent bids valued
the company substantially less,
some of the people said.
Since Cfius intervened in
March 2018, Cofense has lost
business as its senior manage-
ment team has been occupied
with the sale and completing a
Cfius-ordered audit, one of the
people said.

Potential

Deal on

Cofense

Emerges

By Dawn Lim ,

Will Louch

and Juliet Chung

The 10-year yield

has tumbled

to 1.54% from 2.03%

at the start of August.