Long Bonds Suddenly Back in Vogue as Supply Fixes Ease Angst
(Bloomberg) — Pressure on long-dated bonds is easing around the world as investors eye supply changes and hunt for bargains after a selloff.
Yields on 30-year US bonds have fallen around 25 basis points since early September, while those on UK gilts have dropped 20 basis points and their Japanese counterparts have fallen nearly 15 basis points. That has reversed a period of heavy selling that roiled the world’s biggest government bond markets, pushing Japan’s long-dated yields to an all-time high and those on gilts to their highest level since 1998.
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The rally is partly being driven by a reduction in long-end supply. Japan’s finance ministry has proposed trimming issuance of long-dated debt in upcoming auctions. The Bank of England lowered the share of long-end bond sales in its QT program starting next month. Australia’s debt manager also previously said it would consider reducing issuance of ultra-long bonds.
“The large steepening of the summer has slowed and started to reverse,” said Matthew Amis, a fund manager at Aberdeen, who has a long position in 30-year gilts. “There’s not going to be a lot of supply in that back-end of the market.”
The supply change is fueling a widespread rethink. TS Lombard strategists said supply “fixes” are creating buying opportunities in the UK and Japan. The shift in sentiment around the long end has also rippled over to the US, where strategists at Citigroup Inc. and Bank of America Corp. have exited trade recommendations that longer-term Treasuries would underperform.
The return of a degree of optimism about the outlook for long bonds underscores how much supply concerns drove the recent selloff, even if broad fears of ballooning fiscal deficits have fanned the flames.
The rise in 30-year yields globally wasn’t a sign of “imminent fiscal apocalypse,” according to Davide Oneglia, an economist at TS Lombard. Instead, he puts it down to falling demand from pension funds and insurers — typically the most active in this part of the curve — and central bank quantitative tightening programs. “More forceful action from authorities to reduce long bond issuance should present investors with decent opportunities,” he added.
In the US bond market, concern around the independence of the Federal Reserve was a factor in driving 30-year yields toward 5% earlier in the month. But a near unanimous policy decision last week has made that less of a worry at Citi, prompting its rates strategists to recommend clients take profit on bets that 30-year interest-rate forwards will trail five-year tenors.
Anne Walsh, chief investment officer at Guggenheim Managers Inc, said rates on 30-year bonds should remain below 5% as long as inflation is running below 3%.
“Our current base case and expectation for inflation is that we’re still continuing to see disinflationary pressures,” she said. “So we are a little bit more positive than our peers are potentially on inflation continuing to come down, but at a slower pace.”
After the long-bond selloff, investor rebalancing could be a feature with funds buying third-quarter underperformers, according to Eugene Leow, senior rates strategist at DBS Bank Ltd. in Singapore.
“Within this group, we think there will be duration preferences,” he wrote in a note this week. “We reiterate that ultra-long tenor Japanese government bonds look attractive.”
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Strong global growth is also helping the long-end, easing fears about the impact on fiscal deficits and making investors reconsider the longer term path of interest rates.
In Asia, that rationale underpinned a new trade call from Societe Generale’s Stephen Spratt this week. The interest-rate strategist recommended that Australian investors buy flatteners, specifically a position that will gain if the nation’s 10-year debt outperforms its three-year counterpart in the weeks ahead.
“The forward growth data suggests more strength to come,” Spratt said of Australia’s economic outlook.
Bloomberg’s Global Aggregate index shows staking big duration bets is starting to pay off. Debt due in 10 years or more is charging ahead of other maturities in terms of returns this month, with a 0.7% gain. That compares to just 0.2% for debt maturing in the next couple of years.
“There is a tremendous amount of value” with the US 30-year real yield at 2.5%, Matthew Hornbach, Morgan Stanley’s global head of macro strategy, told Bloomberg Surveillance. “Long-term investors who have been buying 30-year TIPS are sitting pretty well today.”
To be sure, there are still risks on the horizon. Fiscal concerns haven’t gone away and interest-rate cuts could see yield curves steepen further. Politics may also erode the sense of calm: The Labour Party conference in the UK could jolt gilt market confidence next week, while a new prime minister in Japan brings the risk of additional spending pledges.
But recent auctions show demand is strong. Japan’s 40-year government bonds rallied after investors piled into an auction of that maturity on Thursday and a 20-year debt sale last week saw its strongest demand since 2020.
“The long-end is back,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho.
–With assistance from Carter Johnson, Ruth Carson and Michael MacKenzie.
