The market widely expects Treasury prices to fall as Federal Reserve tightening inches closer, but contrarian bets that bonds will continue to march higher are emerging.
"We expect high uncertainty to make the fourth quarter a risk-off one," Tim Condon, chief economist for Asia at ING, said in a note Tuesday. "Long-dated U.S. Treasurys and their proxies [investment-grade-rated bonds] are our top picks to perform in the fourth quarter," he said, citing expectations investors will seek safe-haven plays.
Condon sees risks from both the Federal Reserve's likely moves toward tightening policy and from China's economy.
"With the Fed scheduled to complete tapering on October 30 questions about the lift-off will become more urgent," Condon said, citing concerns over when and how high interest rates will rise. "The Fed wants to be transparent and pin down expectations, but we also think prudence dictates that investors prepare for bouts of financial market volatility from their efforts succeeding only in part."