Bond investors who have repeatedly gotten burned buying 20-year Treasuries since the US government reintroduced them in 2020 appear willing to conclude that this time will be different.
PGIM Fixed Income is among fund managers looking to capture windfall profits by snapping up 20-year bonds, whose extra yield over its 30-year peer is hovering at about 15 basis points. The asset managers expect to make money as that gap narrows — sparked by the Treasury’s issuance plans and expectations the Federal Reserve is near the end of its tightening cycle.
Since their relaunch, 20-year bonds have been plagued by sub-par demand relative to bigger initial auction sizes, leading their yields to tend to trade above those on both 10- and 30-year Treasuries. That underperformance, however, has been reined in as Treasury cut the supply of the 20-year from late 2021 through November last year. Then last week it said that amid plans to boost auctions, it would lift the 20-year by a smaller degree.
Ten-year notes traded at about 4.01% Wednesday, after a sale of the debt as part of the Treasury’s refunding round. Meanwhile, the 20-year yielded 4.33% and the 30-year about 4.18%.
“You want to own as much of the 20-year Treasury as you can get your hands on,” said Michael Collins, a fund manager at PGIM. Twenty-year debt is trading “cheap and you’re going to monetize that if you short 10s, 30s and go long 20s.”
The Treasury began selling the 20-year maturity again in 2020 — after having abandoned it in 1986 — in an attempt to broaden its investor base.
The department last week increased the size of its quarterly refunding for the first time since 2021 to help finance a swelling budget deficit. It laid out plans to lift issuance across maturities over coming months, but unveiled smaller increases to 7- and 20-year debt.
Given those dynamics, it could make sense for investors to tactically buy “chronically cheap” 20-year Treasuries, anticipating their yield premium will compress, according to JPMorgan Chase & Co.
“The 20-year has been a flashpoint for people since the bond was resurrected about three and half a years ago, and I think, in part because investors have been burned in the 20-year sector,” Jay Barry, the bank’s head of US government-bond strategy, said on Bloomberg Television. “It’s probably going to be well-supported, particularly because even as these increased auction sizes go on, the Treasury is increasing the 20-year by less than its counterparts along the rest of the curve.”
Yields have declined in the past week since approaching cycle highs touched in October. The latest peak came on the double-whammy of the Treasury’s move to boost note and bond sales, followed by a downgrade of the US by Fitch Ratings. Buyers started emerging at the end of last week on signs US job growth is slowing.
Thursday’s release of the July consumer price index could serve to extend the retreat in yields if the data proves to be on the soft side. CPI is expected to have increased at a 3.3% annual pace in July, marking the first acceleration since June 2022, according to the median forecast of economists surveyed by Bloomberg. The core measure — excluding food and energy prices — is projected to ease to 4.7%, from 4.8%.
For Michael Contopoulos at Richard Bernstein Advisors, a meaningful flight to safety will likely be the trigger for 20-year yields to compress toward 30-year rates — a move that would be exacerbated by the shorter tenor’s relative lack of liquidity.
“We actually at RBA love the 20-year part of the curve,” Contopoulos, the firm’s director of fixed income, said on Bloomberg Television.
“You’re going to get a rush into an asset that not everybody loves currently,” he said. “It could really cause the yield to collapse pretty meaningfully.”
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