Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high. Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high. Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.

Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The overwhelming demand observed during last week's ultra-long sovereign bond sales suggests investors are confident central banks will deliver aggressive rate cuts by year-end. However, if policymakers were to prove cautious about cutting rates, these positions may incur significant losses. As the economy remains robust in the United States, and inflation remains above central banks' target on both sides of the Atlantic, we remain cautious and prefer maturities of up to ten years while taking a selective approach for ultra-long duration.


In recent weeks, markets have experienced a significant shift.

Bond futures started the year pricing in the possibility of seven rate cuts in Europe and the U.S. Still, in six weeks, odds for rate cuts dropped to 4.5 (approx. 115 basis points) this year, driven by policymakers’ pushback against early and deep rate cuts and robust economic data. Such a move caused U.S. Treasury and European sovereign yields to rise.

However, investors are not convinced by the “high-for-longer” message that central bankers are sticking with, particularly in Europe, where the sluggish economic growth in the region and disinflationary trends contradict the ECB’s holding stance. Consequently, the contrast between policymakers' holding message and markets' expectations for rate cuts has created a window of opportunity for investors looking to take advantage of high yields ahead of a dovish ECB tilt.

Last week’s busy ultra-long sovereign bond issuance has shown evidence of buy-the-dip solid demand and duration extension on both sides of the Atlantic.

Investors welcomed an avalanche of 30-year sovereign bonds last week.

Below is a list of ultra-long sovereign bonds sold by various countries last week:

  • €5 billion 30-year Belgium bonds (BE0000361700). The new Belgian ultra-long bonds pay a coupon of 3.5%. Final books were above €60 billion, with the bonds receiving twelve times more bids than the amount offered.
  • €6 billion of 30-year Bunds (DE000BU2D004). Initial guidance indicated that the new issuance would have offered 5.5bps over the benchmark, but with high demand (books totaled bids above €74 billion), the issuer was able to secure a tighter spread: 4.5bps over the benchmark. The yield offered by these securities at issuance was 2.537%.
  • €6 billion of 30-year Spanish Bonos (ES0000012M93). The bonds were priced with a yield of 4.002%, two basis points tighter than the initial guidance of +14 basis points over the benchmark due to high demand, with books exceeding €83 billion.
  • €1.426 billion of 30-year French OATs bonds (FR001400FTH3). The auction received a total of €4.128 billion in bids, securing a bid-to-cover ratio of 2.89, compared to 2.32 the previous month. At their reopening, bonds paid on average 3.27% in yield.
  • £2.5 billion 30-year green Gilts (GB00BM8Z2V59). The reopening received an unprecedented £7.636 billion in bids, oversubscribed by 3.05x, the most since April 2020. The bonds were sold with an average yield of 4.56% at issuance.
  • $25 billion 30-year U.S. Treasuries (US912810TX63). The auction saw indirect bidders rising to 70.7%, the highest since August 2023, but direct bidders dropping to 14.5%, the lowest since August 2020. The high yield at issuance was 4.36%

As yield curves steepen, ultra-long bond duration becomes more attractive, although risks remain.

The reason behind buy-the-dip demand may go beyond expectations that central banks will begin to cut rates this year as inflation reverts to its mean. A gradual steepening of yield curves, which started last year, and short future position covering in the U.S., may have also played a critical role in igniting investors' demand for the long end.

Today, investors can secure a small, although better, pick up in 30-year bonds than 10-year notes compared to the past couple of years.

The most striking example is the one of the Bunds, with the spread between 30-year and 10-year Bunds around 20 basis points, one of the highest since it returned positive in March 2023 after being negative for almost six months. A negative 30/10-year Bund spread implied investors received a lower return to hold 30-year Bunds than 10-year Bunds.

As yield curves continue to normalize and become steeper, the spread between 30-year bonds and 10-year notes will continue to widen and normalize around 100 basis points. While it is true that an aggressive cutting cycle is likely to benefit ultra-long maturities, it is also true that a first-rate cut by central banks may work the opposite way for the duration as a classic “buy the rumor, sell the news” drives investors to take profit on their ultra-long position.

To add to uncertainties surrounding the future performance of ultra-long bonds is how the cutting cycle will pan out. If central banks cut rates cautiously, there may be limited room for upside for duration. If rates remain higher than what markets were accustomed to before the COVID pandemic, that may be negative for the long term.

We already see discrepancies between what markets are pricing and what economists expect. The bond futures market expects the deposit rate to fall to 2.75%. However, the recent Bloomberg’s euro area economic forecasts survey shows a less aggressive cutting cycle, with the ECB deposit rate falling to 3% by year-end in Feb. Whether the ECB will cut four or five times by year-end will have profound consequences on how the yield curve is going to steepen. A slow-cutting cycle might encourage the yield curve to "twist-steepen," with the short-end dropping and the long-end rising.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.