The Bond Trade of the Year May Be Back, All Thanks to the Fed
Top-rated markets from the U.S. to Germany saw securities due in 10 years or more rally on Thursday.
(Bloomberg) -- The Federal Reserve’s hint that it could halt interest-rate cuts amid lingering global economic gloom may have given bond traders just the thing to reboot this year’s best trade -- buying long-dated government debt.
Top-rated markets from the U.S. to Germany saw securities due in 10 years or more rally Thursday, outpacing short-dated ones, dragging yield curves down from the steepest levels in about three months. Mizuho International Plc suggests that investors position for an extension of the move with so-called flattener trades, which profit when longer-term yields fall faster than near-maturity ones.
The latest bond gains signal a return, after a two-month letup, to the bullish tone that fueled a stellar rally earlier this year. Treasuries due in 10 years and longer have returned almost 17% since Dec. 31 as growth pessimism fueled a flight into the safest assets. That compares with around 5% for maturities of one to 10 years.
While demand for far-maturity sovereign debt should continue amid unresolved global trade tensions, a Fed policy pause means less downward pressure on short-term yields -- and that points to a flatter curve.
“There is a pretty clear return in demand for global rates duration,” said Peter Chatwell, head of European rates strategy at Mizuho. “The Fed’s pause is not an end to its easing cycle, but for now it means U.S. curves can bull-flatten rather than steepen.”
Thursday’s bond rally suggested some market skepticism over Fed Chairman Jerome Powell’s remark that U.S. monetary policy is now in a “good place” -- an assurance that may have been partly overshadowed by China casting doubts about the possibility of a comprehensive long-term trade deal with the U.S.
The yield advantage on 10-year Treasuries over two-year notes fell about one basis points Thursday to 16 basis points, extending a pullback from an Oct. 29 peak of 20 basis points, which was the highest since July. A similar spread in Germany declined two basis points to 25, compared with an Oct. 22 high of 32 basis points that was the most since Aug. 1. The yield on U.S. debt due in a decade slumped seven basis points Thursday to 1.70%, touching the lowest since mid-October.
Mizuho recommends buying 30-year Dutch bonds versus selling French 10-year debt. That’s in addition to outstanding flattener recommendations in the U.S. and Australia.
To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Anil Varma
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