Bond investors have ridden a profitable playbook this year to score big wins on Federal Reserve interest-rate cuts and tumbling short-term US yields.
Now, they’re ready to look out a little longer on the Treasury curve.
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A cluster of bullish option trades has emerged over the past two weeks, wagering that a rally in 10-year US Treasuries will drive the benchmark below 4% for the first time since April. Pacific Investment Management Co. is advising clients to lock in yields while they remain attractive, just as JPMorgan Asset Management and TD Securities notice clients moving out of short-term notes and into longer, higher-yielding maturities.
“There’s still a lot of caution in markets not to jump the gun, but they are dipping their toes in,” said Gennadiy Goldberg, head of US interest rates strategy at TD Securities. “It is good to lock in these higher rates for longer, but very, very cautiously.”
Taken together, the momentum — enhanced somewhat by reaction to the US government shutdown — pushed down 10-year Treasury yields by 0.05 percentage point in the past week to near 4.1%, the lower end of the recent trading range. Thirty-year yields, seen as riskier though still benefiting from the trend, also edged down to about 4.7%.
“The bond market represents good value,” said Warren Pierson, who oversees $180 billion in fixed-income assets as co-chief investment officer at Baird Funds. “For retirees in general, pension plans, those levels of interest rates are pretty good.”
Market Shift
The renewed attention on longer-term debt is a switch for investors who have spent much of the year betting successfully that the gap between US short- and long-term yields would widen.
The so-called curve steepener paid off handsomely as expectations for renewed Fed rate cuts sent policy-sensitive short-term yields plunging, while the long end remained more elevated in part on fiscal and political concerns. The dynamics also helped the bond market turn in its best year-to-date performance in five years through September, according to a Bloomberg index.
More recently, the trade lost steam as long bonds no longer underperformed. The gap between US five- and 30-year bonds has shrunk to roughly 1 percentage point, after reaching a four-year high of about 1.26 percentage points in early September.
[SRC] https://finance.yahoo.com/news/bond-traders-dare-longer-4-190000110.html
