(Bloomberg) -- Deutsche Asset Management's Christian Hille is tuning out a chorus of warnings that Treasuries are in a bear market. In fact, he's staked most of his $140 billion portfolio on a bet that the rise in yields has pretty much topped out, clearing the path for gains in risk assets.
“We saw the selloff of a couple of weeks ago as a bull market correction and not the start of a bear market,” said Hille, who heads Deutsche Asset's global multi-asset division. “We see that 10-year nominal and real yields have risen fast, but we don't see a high probability that we'll substantially exceed 3 percent in the short term.”
Hille has been loading up on risk assets in the belief that core U.S. inflation is likely to stay contained after early-year seasonal effects wear off, while a debt overhang may stifle the pace of rate increases. He dismisses Wall Street sell-side bets on four hikes this year, and sees three as the more likely outcome.
His view is at odds with big-name investors like Paul Tudor Jones and Michael Hasenstab who have warned the rout in Treasuries is only just getting started. Concerns that higher rates would undercut valuations contributed to the biggest selloff in U.S. equities in two years last month as Treasury yields edged toward 3 percent. Benchmark 10-year notes yielded 2.84 percent in Monday trading.
Hille is using market dips to add to his overweight holdings in equities and emerging markets, which he thinks will continue to perform well amid synchronized global growth and strong earnings.
For all the signs of economic strength that have been causing jitters in the bond market, January data showed inflation is still stuck below the Fed's 2 percent target as it has been for most of the past five years.
Big Risks
Hille is aware that his bet holds big risks. If a sudden bond selloff sends yields past 3.5 percent, the higher rate would entice foreign investors back to the U.S. at the expense of risk assets. At the same time, a stronger U.S. currency would sap the carry traders earn from swapping dollars for emerging-market currencies.
While he only puts that risk at about 20 percent at most, he's safeguarding with hedges in inflation-linked bonds and gold. He's also been increasing duration in case an equity selloff boosts demand for long-dated bonds.
“The rise in Treasury yields is one of the central questions for multi-asset investors,” Hille said. “We're watching that very carefully but as long as it doesn't happen, the trade and the positioning is really intact and if we see downside we are using it as an opportunity to take on more risk.”
To contact the reporter on this story: Natasha Doff in Moscow at ndoff@bloomberg.net.
To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Cecile Gutscher, Sid Verma
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