Bond Market's Sleeping Giants Wake Up Post-Fed to Flatten Curve

(Bloomberg) -- The bond market’s stalwarts finally stepped in after the Federal Reserve’s decision, and their appetite had little to do with the central bank itself.

The 30-year U.S. yield tumbled in the hour after the Fed released its January statement, pushing the Treasuries yield curve from 5 to 30 years to the flattest level since August 2007. Traders and strategists pointed to a wave of month-end purchases from investors like index funds and pensions as driving the rally, which coincided with the S&P 500 Index’s dip to its weakest point of the day.

Traders in the world’s biggest bond market had been waiting for these buyers to emerge, particularly after U.S. equities posted handsome gains this month while Treasuries sold off. For long-term investors like pensions, the divergence magnifies their need to rebalance. Yet those purchases appear to have been absent for much of this week, with the yield curve steepening the previous two sessions.

When it comes to the long-bond rally, “I don’t think the Fed really had much to do with it -- strong month-end flows appear to be the reason,” said John Briggs, head of strategy, Americas, at NatWest Markets. Among the likely buyers, he lists “indexers that need to extend duration to keep up with index extension, and pension funds allocating out of stocks and into bonds to keep allocations steady.”

Market Pillars

The return of these bond-market pillars, even if short-lived, marks a shift from what strategists say has been largely momentum traders pushing Treasuries toward their worst January since 2009. The 10-year yield climbed above 2.75 percent for the first time since April 2014 after the Fed announcement, at which officials left their benchmark rate unchanged.

The yield curve from 5 to 30 years began flattening in earlier New York trading, after the Treasury said it would boost 30-year bond auctions by $1 billion. Some investors expected a larger increase, said Gennadiy Goldberg at TD Securities, which accurately estimated the new $16 billion level.

There’s no guarantee the rally will have legs. Some investors are bracing for higher yields as a March rate hike from the Fed is seen as practically a lock. 

Bill Gross, fund manager at Janus Henderson Group, said Wednesday he sees the 10-year Treasury yield headed to 3 percent, while Dan Fuss at Loomis Sayles doesn’t see any bargains in Treasuries even after January’s selloff.

“Nothing in Treasuries” looks like a great opportunity, Fuss said in an interview on Bloomberg TV. A 3 percent 10-year yield “is not any more important than any other level.”

--With assistance from Vonnie Quinn Mark Barton and Tom Keene

To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net, Edward Bolingbroke in New York at ebolingbrok1@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Jenny Paris

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