|US GOVTS-Long-end becoming unanchored; steepener a go with trade (belly over bonds) Jun 01 2020 08:39 The transition from month-end to the new month tends to be turning points for market trends when the market leaves the noise of month-end duration extensions and portfolio rebalancing for clearer and less impeded trading skies. A trend that is getting a fresh head of steam is the steepening of the yield curve. Or perhaps better said the unmooring of the very long-end of the curve.|
Consider as well that this is a global phenomenon with the 30-year in Germany and Japan both appreciably underperforming on their respective curves. The common denominator appears to be pressure from fiscal policy concerns as the long-term sovereign borrowing needs are set to explode in all locales. With the respective central bank balance sheets already heavily strained the market is now sharing in the strain under the anticipation of significant more marketable duration heading its way. With the front-end of the curve well anchored to the zero-bound/NIRP the respective curves are having little choice but to steepen out. Look for this trend to continue.
The current preference appears to be to own the short-belly of the curve (3-year to 10-year) versus selling the 30-year and the 20-year if the latter to a lesser extent. Best bet; stick with a neutral/defensive approach favoring the buying of dips in the 3 to 7-year sector while selling strength in 20s & 30’s. We will move our entry point up to 113.5 bps to reengage the 5s/30s steepener.
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