US long bonds give traders lesson in risk with September rout

Investors spent much of 2016 paying higher prices for long bonds to maintain income as yields fell across the curve

17:42 September 16, 2016

Singapore: US 30-year bonds have lost 5 per cent in September, heading for their worst month in a year and half, as the Treasury’s most volatile securities go down about as fast as they went up.

Thirty-year yields climbed to the highest level since June this week on concern central bankers globally are contemplating the limits of the record monetary policy measures they’ve used to support their economies. Demand at a 30-year sale declined to the lowest level since February.

Investors spent much of 2016 paying higher prices for long bonds to maintain income as yields fell across the curve. Traders were rewarded with returns of almost 20 per cent through the end of August, based on Bank of America Corp.’s bond indexes. The move worked in their favour because longer-dated bonds tend to move the most when the market shifts. Now they’re left holding the securities most vulnerable in a sell-off.

“There may be still more to go,” said Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, which has about $52.9 billion in assets. The firm trimmed its holdings of US long bonds two weeks ago and may add longer maturities when the decline stops, he said.

12-week high

The US 30-year bond yield fell three basis points, or 0.03 percentage point, to 2.44 per cent as of 7.08am. New York time. The yield climbed to 2.5 per cent on Thursday, the highest level since June 24. The 2.25 per cent security due in August 2046 rose 19/32, or $5.94 per $1,000 (Dh21.82 per Dh3,673) face amount, to 96 3/32.

Two-year yields were little changed at 0.73 per cent in the US and negative in Japan and Germany, giving investors reason to seek higher income streams from longer-term debt.

“Are central banks reaching the limit of what they can do? What’s the next stage? That’s the big picture that is being discussed by markets now,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. That’s one factor “that could push longer-dated bond yields further up.”

The European Central Bank is studying ways to redesign its debt-buying programme, raising speculation it will curb its purchases of government securities.

The ECB is however, “not in a position to give up on its policies” at this point, Daheim said. “The bullish market view should start to resurface again. So for that reason at this juncture we are not subscribing to fears that we could see sell-off akin to what we saw in April last year,” he said, referring to a leap in German yields starting in April 2015 that helped set off a global sell-off in debt.

BOJ shift

The Bank of Japan will try to steepen its yield curve, increasing the difference between short- and long-term yields, at a meeting next week, according to Morgan Stanley MUFG Securities Co. in Tokyo. The BOJ would achieve that by cutting its negative interest rate further, while also reducing purchases of long-term bonds, the company said in a report.

Traders have been speculating for days that BOJ Governor Haruhiko Kuroda will implement the move as a way to support the nation’s lenders and support the economy. A steeper curve helps banks when they borrow for shorter terms and make long-maturity loans. It also provides savers greater returns for those willing to invest over several years.

The Federal Reserve may raise interest rates as soon as December, futures contracts indicate. US data on Friday will show consumer prices increased in August, while consumer sentiment rose in September, based on Bloomberg surveys of economists.

Treasuries are being driven by speculation about changes in global monetary policy, said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management Co. in Tokyo. “More so in the longer end.”