Citigroup Inc. strategist David Bieber said the recent jump in long-term yields has balanced positioning. But he said the pendulum is likely to swing back and drive another round of yield-curve flattening as growth concerns exert a drag on long-term yields.
“Only when the Fed starts pushing back on raising rates will the flattener trade end and a steepener take hold,” Bieber said.
Longer term positioning in Treasury futures among institutional investors shows a substantial weighting in trades that favor a flattening or narrowing of 2- and 10-year yields, according to Citigroup. It said that by early May the scale of such positions by hedge funds and asset managers exceeded those amassed during the 2018 tightening cycle by 1.5 times.
Other have been riding out the uncertainty in short-term debt, whose yields have already surged in anticipation of the Fed’s moves this year. Those on two-year Treasuries have jumped from around 0.7% at the end of last year to about 2.7%, ending last week relatively little changed compared with other securities.
The jump this year provides “a substantial cushion against a more hawkish Fed,” said Jerome Schneider, the head of short-term debt for Pacific Investment Management Co.
This article was provided by Bloomberg News.