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Theme · past 4 weeksUS, UK, Japan

The long end peaks, then rallies

Long yields hit multi-decade highs in early October, then strong auctions and a rotation out of stocks turned the sell-off into a round trip.

What it did to the curve

Front end

Yields mixed

2-year

Long end

Yields mixed

10–30-year

Curve

mixed

long minus short

A round trip, not a trend: US 10s rose to about 5.35% on 7 Oct and ended near 5.09%, close to where they began; the gilt 30-year peaked at 6.036% on 7 Oct; and JGB 30s fell from a record 4.235% on 5 Oct to about 4.00%.

US 10-year, 7 Oct high

about 5.35%

downback to about 5.09%

Intraday, the highest since 2002; by 16 Oct it was back near late-September levels (5.11% on 23 Sep).

Gilt 30-year peak

6.036%

uphighest since Jan 1998

7 Oct (Reuters). It first went above 6% on 1 Oct, at 6.029%.

JGB 30-year

about 4.00%

downfrom a record 4.235%

16 Oct against the 5 Oct record, after Japan’s 30-year auction drew firmer demand.

US 10-year auction, 7 Oct

5.300%

$39bn, the highest 10-year sale yield since Nov 2000, yet 1.7bp through when-issued: buyers were there.

What happened

Early October looked like a breakout. The 10-year hit 3.055% on 24 Sep, its highest since 1996. On 1 Oct the 30-year went above 6% for the first time since 1998, and on 5 Oct Treasury 10s and 30s set 24-year highs as the JGB 30-year hit a record 4.235%. On 7 Oct the US 10-year touched about 5.35%, the highest since 2002, and the gilt 30-year peaked at 6.036%.

The long end is where lives: the extra yield investors demand to hold through inflation, supply and fiscal risk. The ACM model put the US 10-year term premium at about 1.07% on 9 Oct.

Then supply met demand. The $39bn 10-year auction cleared at 5.300%, the highest since November 2000. But it stopped 1.7bp through the when-issued yield: buyers accepted a lower yield than the market was trading at, a sign of strong demand. Indirect bidders, such as foreign central banks, took about 80.3%.

Other sales went well too. The 30-year sale at 5.618% went smoothly, and Japan’s 30-year auction drew firmer demand. High yields were finding buyers.

In the week of 12–16 Oct, money rotated out of AI and tech stocks into bonds. Long yields fell most: the 10-year by 15bp and the 30-year by 17bp. The 2-year fell only 6bp, so this was a bull flattening led by the long end, the move a captures. US 10s ended near 5.09%, close to where they began: the sell-off had become a round trip.

Timeline

  1. · Japan

    JGB 10-year rises 8bp to 3.055%, its highest since August 1996

  2. · UK

    Gilt 30-year goes above 6% for the first time since 1998, at 6.029%

  3. · Japan

    JGB 30-year sets a record 4.235% as US 10s and 30s hit fresh 24-year highs

  4. · US

    $39bn 10-year auction clears at 5.300%, 1.7bp through; the 10-year touches about 5.35%

  5. · UK

    Gilt 30-year jumps 13bp to peak at 6.036%, the highest since January 1998

  6. · US

    30-year auction at 5.618%, the highest since Aug 2000; the 10-year falls 5bp to 5.227%

  7. · US

    Week ends with the 2-year −6bp, 10-year −15bp and 30-year −17bp; 10s close near 5.09%

What could change it

Base case

The early-October highs hold as the peak while auctions keep clearing and money keeps moving from stocks to bonds. Long ends trade in a range as the Fed, ECB and BoJ meet.

Watch: FOMC, 27–28 Oct · ECB, 29 Oct · BoJ, 29–30 Oct

Bear risk: new highs

Term premium comes back. A Budget that leaves thin headroom (the Reuters poll median is about £10–12bn, from £23.6bn in March) or another hot inflation print could send the gilt 30-year back towards 6.036% and Treasuries towards their 7 Oct highs.

Watch: UK CPI, 21 Oct · UK Budget, 28 Oct · US PCE, 29 Oct

Relief rally

Demand for duration keeps winning. In BofA’s October survey, 6.0% was the most common yield at which fund managers said they would switch from stocks to bonds, a sign of buyers if yields rise again. A credible Budget would add a UK leg.

Watch: UK Budget, 28 Oct · FOMC, 27–28 Oct

How desks express it

Treasury 10-year auction concession

Butterfly

Buy 10y, sell 5y and 30y Treasuries into the auction (DV01-neutral fly)

Big sales cheapen the new issue in the run-up; when demand turns out strong, that concession unwinds after the auction.

  1. 1

    Supply needs room: the 10-year tends to cheapen against its neighbours as the market makes space for $39bn of new notes.

  2. 2

    Strong demand reverses it: the 7 Oct sale stopped 1.7bp through the 5.317% when-issued yield, with bid-to-cover at 2.77 against a 2.51 average.

  3. 3

    Yields backed off after the sale, and the solid 30-year sale on 8 Oct helped take the 10-year down 5bp to 5.227%.

Wrong if: A tail instead of a stop-through, if indirect demand (about 80.3% on 7 Oct) fades. The FOMC on 27–28 Oct can swamp any supply effect, and the fly loses if the 5y and 30y richen more than the 10y.

US 2s30s flattener

Curve

Pay 2y, receive 30y SOFR swaps (DV01-neutral)

In a long-end-led rally the 30-year falls faster than the 2-year, which stays tied to the Fed path.

  1. 1

    Rotation out of AI and tech stocks brought buyers for long duration: in the week of 12–16 Oct the 30-year fell 17bp against 6bp for the 2-year.

  2. 2

    The 2-year stays anchored by policy pricing, with a December Fed hike about 89% priced.

  3. 3

    A DV01-neutral flattener gains if the gap between 30-year and 2-year yields narrows, whichever way the level goes. (The 12-month term-premium theme argues the opposite on a longer view.)

Wrong if: Term premium returning: a disappointing UK Budget on 28 Oct or another oil jump could bear-steepen long ends globally. A dovish FOMC on 28 Oct that prices out December would rally the 2-year faster and steepen the curve.

Educational expressions of the theme — how a desk might position, not advice.

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