There may be a return to a type of trade that left them battered earlier this year
Bond traders are eyeing a return to a type of trade that left them battered earlier this year - betting on yield curves returning to a more normal shape as slowing economies force central banks to cut interest rates.
In these trades, investors buy a short-dated bond in the hope that its price will rise and the yield will fall, and short - that is, bet against - a longer-dated bond for the opposite reason. They are likely to use futures contracts, which make it easier to bet on the direction of assets. “It’s a typical end-of-cycle trade,” said Fabio Bassi, head of international rates strategy at JPMorgan. “I would expect that in the next quarter, more people will start positioning for a steepening of the yield curve.”Central banks’ rate hikes have pushed up yields on short-dated bonds, which are highly sensitive to short-term borrowing costs. Longer-dated yields have risen less sharply, because investors expect rates to fall at some point in the future.
“We have already started to switch, some months ago, from flattening to steepening in Europe, mainly at the long end of the curve,” said Anne Beaudu, global fixed income portfolio manager at Amundi, who said she is betting on a steepening of the 10-year-to-30-year section of the yield curve. Analysts said a key factor in the move is a growing belief that the U.S. economy might avoid any serious downturn. That could complicate bets on a “bull steepening” - where shorter-dated yields drop as interest rates fall.
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