3% is noteworthy but it's not signaling a spike
Federated’s duration committee today trimmed its tactical short position for fixed-income portfolios
The move was driven primarily by technical factors led by the 10-year Treasury’s break above 3% this week and a 23 basis-point increase in the broader U.S. Treasury Index in the three weeks since the duration committee last met. Yields are now trading above the highs of their two-month trading range. The committee does think further increases in yields could confront resistance. Deterrents include the equity market's negative reaction to the breach of 3% on the 10-year, the apparent loss of growth momentum in other developed countries and ever-present event risks (geopolitics, trade, presidential tweets, etc.).
That said, the duration call is being kept short of neutral as the committee still sees the bias on rates as higher for four reasons: 1) expectations inflation will continue to rise toward the Fed’s 2% target; 2) strengthening U.S growth despite an anticipated weaker first-quarter GDP print this week (the initial Q1 GDP estimate is due Friday); 3) the likelihood for two and possibly three more rate hikes this year from a “gradualist” Fed; and 4) rising fiscal deficits in the wake of tax cuts and spending increases.
What short duration means
Duration reflects the sensitivity of a fixed-income instrument (or a fixed-income portfolio) to changes in market interest rates. Longer maturity bonds tend to have longer durations. Being “long duration” means a fixed-income portfolio has a duration that is higher—more sensitive to changes in market rates—than its benchmark and thus would gain in value relative to its benchmark if market yields decline. Short duration is the opposite, meaning a portfolio has a duration lower than its benchmark and the portfolio will decline in value less than its benchmark if market rates rise.