Wall Street Adopts Defensive Stance Toward 30-Year U.S. Treasuries: Avoidance or Shorting

As of June 3, institutional investors in the U.S. bond market, including DoubleLine Capital, Pimco, and TCW Group Inc., have increasingly adopted a cautious approach toward 30-year U.S. Treasury bonds. Due to mounting concerns over the expanding U.S. budget deficit and rising debt levels, these firms are either reducing their exposure to long-duration government securities or actively shorting them. Instead, they are favoring shorter-term bonds that offer lower interest rate risk while maintaining favorable yields.

This shift from long-term to shorter-term bonds has been reinforced by global increases in government spending, from Japan to the United Kingdom and the United States, which has undermined confidence in long-duration debt. The strategy has proven effective so far this year. Last month, Moody’s—the last of the major three credit rating agencies—downgraded the U.S. sovereign credit rating from Aaa, following earlier moves by S&P and Fitch.

The steepening of the U.S. Treasury yield curve has become more pronounced in 2024. While yields on shorter maturities such as 2-year and 5-year bonds have declined, the yield on the 30-year Treasury reached 5.15% last month—approaching its highest level since 2007. The spread between 30-year and 5-year Treasury yields also widened beyond 100 basis points for the first time since 2021, a rare occurrence last seen over a full year in 2001. This trend reflects the premium investors now require to hold long-term U.S. government debt.

Richard McGuire, a strategist at Rabobank, remarked that the uncertain U.S. policy outlook has made the long end of the Treasury curve unattractive. Bill Campbell of DoubleLine confirmed that where possible, the firm is shorting the long end of the curve in anticipation of further steepening. In long-only strategies, the firm is refraining from buying long bonds and instead focusing on intermediate durations.

Pimco had already adopted a cautious view on 30-year Treasuries at the end of last year. The firm’s Chief Investment Officer for core strategies, Mohit Mittal, indicated a preference for the 5- to 10-year segment of the U.S. yield curve and noted the firm's growing attention to non-U.S. bonds. He emphasized that if a bond market rebound occurs, the mid-curve is more likely to lead the recovery than the long end.

Despite long-standing efforts by the U.S. Treasury to maintain a predictable issuance calendar, speculation has emerged regarding a potential reduction in 30-year bond auctions. Bob Michele, Global Head of Fixed Income at JPMorgan Asset Management, suggested that long bonds no longer exhibit the characteristics of risk-free assets and that downsizing or eliminating auctions is a realistic possibility.

“I don’t want to be the one standing in front of the steamroller,” Michele said, expressing concern that the situation may worsen before it improves.

A recent report by TD Securities projected that the Treasury might hint at cutting long-end issuance as early as the August refunding announcement. However, a Treasury spokesperson reaffirmed that demand for all maturities remains strong and that the government remains committed to a consistent and predictable issuance strategy. In an April 30 statement, the Treasury confirmed that auction sizes for long-term and other securities will remain unchanged for the next several quarters.

Looking ahead, market participants are eyeing June 12, when the next 30-year U.S. Treasury auction is scheduled, as a potential inflection point.

Recent long bond auctions in major economies have already drawn significant attention. Japan's 40-year bond issuance last month saw the weakest demand since July 2023, increasing pressure on the government to reduce long-term issuance. Similarly, weak demand at the U.S. 20-year Treasury auction last month has intensified concerns about long-dated bond appetite.