Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
You can access both of our platforms from a single Saxo account.
A guide into Treasuries as we are approaching the US election
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Technical analysis shows that there is space for the US yield curve to flatten amid the US election. However, in the long-term, only a steepening is possible with the 30-year Treasury yields leading the way. The Fed will need to decide soon whether expanding its bond purchasing programme over long-term maturities to avoid a fast steepening of the yield curve.
Even though yesterday the market was a red sea with US equity indices falling around 3.5%, the bond market saw US Treasury yields barely moving. The front end of the yield curve 2s10s was stable while the 5s30s steepened slightly by one basis point. The US Treasury yesterday was able to sell $55bn of 5-year government bonds at a yield of 0.33%, which was 0.5% below the market's expectations. Investors' participation in the auction is key to understanding the prevailing sentiment in the bond market. The bid-to-cover ratio was below the 1-year average, and more than 60% of the notes were awarded to indirect bidders. This means that while foreign demand continues to drive US Treasuries performance, domestic government bond demand is slowing down amid the US election and the reflation story.
To understand how US Treasuries will perform going into the US election week, we can analyze the part of the yield curve that is currently being most active: the 5s30s.
This year, the long part of the yield curve is steepening faster compared to what we have seen from the second half of 2018 until the beginning of this year. The 5s30s spread is trading in an ascending wedge which has tested already twice. It would not be surprising to see the spread trying the support line as we get closer to the election. If the support line is broken, we can see the spread finding the first level of support at 109.30.
At present, long term yields are the biggest movers of the US yield curve. Thus, movements in 30-year yields are critical to understanding the yield curve direction.
Below you find a candle chart of the 30-year Treasury yield since the beginning of the year until today. As you can see, the 30-year yield broke above what it used to be its resistance line. The new support line has already been tested twice. As the election approaches and we experience more volatility in the equity market, it will most likely be tested again. If risk-off sentiment pushes yields below the support line, the 30-year yields will find support at 1.42%.
Even though we can see a slight flattening of the yield curve in the short term, in the long-term, some elements point to the fact that only a steepening of the yield curve is possible.
As the graph below shows, sentiment over US Treasuries has deteriorated since the beginning of the year until today. However, Treasury yields didn't rise because of recent risk-off trading dynamics. We expect this to change as reflation becomes a more threatening factor after the US election, especially if Biden wins.
Investors are increasing their short positions in US Treasury futures as reflation becomes a real threat. 30-year Treasuries are falling faster compared to 10-year Treasuries because the Federal Reserve accommodative monetary policies control the front part of the yield curve. Suppose the Fed doesn't want Treasury yields to rising fast after the elections. In that case, it may need to expand its bond purchasing programme to longer-term maturities.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...