Veriton Investment

Bond-Market Contrarians Look to Buy US 30-Year Near 5% Yield

(Bloomberg) -- In the $30 trillion US Treasury market, some investors see a budding buying opportunity with longer-maturity yields approaching levels rarely seen in the past two decades.

The strategy, from money managers including Columbia Threadneedle Investment and Wellington Management, runs counter to the consensus wager, which is that lengthier tenors will suffer in 2026, especially compared to shorter counterparts, steepening the yield curve.

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The contrarian approach is gaining relevance after a selloff in Treasuries last week drove 30-year yields toward 5%, the highest since September, before purchasers emerged. For Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, it makes sense to go against the herd.

That’s in part because of the growing sense that the Federal Reserve will forgo further interest-rate cuts for months with inflation still elevated. The expectation of additional policy easing has been one of the main pillars supporting bets that short-term Treasuries would outperform and drive the yield curve steeper this year.

“The big debate internally is how much do we sell the front-end and when do we buy the 30-year,” said Al-Hussainy. The firm is “waiting for 5% on the 30-year — it has been our line in the sand,” and is favoring the 10-year for now.

Al-Hussainy has another dynamic in mind — the prospect of a government “backstop” should longer-dated yields surge. President Donald Trump, who has made clear his interest in pushing down long-term borrowing costs, issued a directive this month ordering Fannie Mae and Freddie Mac to buy $200 billion of mortgage bonds.

Last week showed how buying big dips in Treasuries prices can pay off.

Yields jumped early in the week amid a global selloff led by Japan. The move accelerated as Trump’s threat of new levies over his push to acquire Greenland reignited speculation foreigners might dump Treasuries. TCW Group Inc. Chief Executive Officer Katie Koch spoke of a “quiet-quitting of US bonds” by investors looking to diversify.

When Trump backed off from his tariff warning mid-week, Treasuries reversed course. Solid appetite for a 20-year US government-debt sale also helped.

The 30-year yield climbed as high as 4.94% during the episode. To put that in perspective, the peak of the past few years — around 5.18% in 2023 — was the loftiest since 2007. It was around 4.8% on Monday.

“The US long end right now is cheap and is a bargain” given yield levels, says Tim Magnusson, chief investment officer at hedge fund Garda Capital Partners. “The 20-year auction was pretty good and that’s the most unloved security in the market.”

Flip Side

It’s not hard to see why the pessimistic take on 30-year Treasuries is popular now.

For one thing, longer-dated bonds are the riskiest. They do well during rallies, but in selloffs they deliver the most pain. Investors are still scarred by deep losses in the tenor during the Fed’s aggressive tightening campaign of 2022 and amid the turmoil following Trump’s announcement of sweeping tariffs in April. The 30-year proved particularly vulnerable then to speculation around the “Sell America” trade.

These days, the prevailing catalysts for shunning the long end include elevated US deficits that threaten to swell an already substantial debt burden — potentially requiring more bond issuance — and Trump’s pending choice for the next Fed chair.

“Any vocally dovish nominee, without a corresponding weakening economy to justify lower rates, will move long-end yields higher,” said George Catrambone, head of fixed income at DWS Americas.

A JPMorgan Chase & Co. analysis of the 25 largest active US core bond funds, with almost $1 trillion in assets combined, shows exposure to the steepener position is as big as it was for most of last year.

However, even those who are currently underweight the long end — holding less of the maturities than benchmarks dictate — say climbing yields could spur them into action.

Scott DiMaggio, head of fixed income at AllianceBernstein, says he’s positioned in the front end and intermediate maturities, and while reluctant to extend further out the curve, he’s waiting.

“As the 10-year and 30-year creeps up, the urge to buy keeps going higher,” he said.

For now, the longest US maturities are the only ones where yields are down to start the year, signaling there may be limits to the steepener trade.

Wellington’s Brij Khurana sees long bonds playing a key role: as ballast should equities stumble. He’s modestly tilting his holdings toward lengthier tenors.

“Given growth and stock-market performance and corporate profits have been supported by fiscal spending and the AI buildout, if either of those two falter then I think bonds are going to be a much better diversifier to stocks,” he said.