From "Losing Anchor" to "Recovering": Long-End Bonds Launch a Counteroffensive as Capital Returns to Duration

Long-dated government bonds have spent most of this year punishing investors who dared to hold them. Now, yields have risen high enough to lure money back. Risk-free returns are near multi-decade highs, making them hard for investors to resist, especially with equity valuations elevated and volatility rising. This month, the 10-year US Treasury yield approached 5.4%, the highest since 2002; Japanese government bond yields hit a 30-year high of 3.14%. The return-to-long-bonds trade has attracted portfolio managers at several institutions including JPMorgan Asset Management, Aegon Asset Management, Ninety One and Allianz Global Investors. The yield trajectory has now reversed: in October, the benchmark return on global government bonds of 10 years and longer was 2.2%, easily outperforming the flat performance of 1-to-3-year sovereign debt, marking the first time since February that long bonds have beaten short bonds. These profits have, at least temporarily, prompted investors to overlook the dangers that initially drove yields higher. Energy-driven inflation, tighter monetary policy and deteriorating government finances have not disappearedthe price of bearing those risks has simply become more attractive. "The long end had fallen too far, and pricing had lost its anchor," said Bob Michele, global head of fixed income at JPMorgan Asset Management. He has been buying long bonds in Australia and Japan as well as US Treasuries. As investors question whether tech companies are overpromising on artificial intelligence, government bonds are once again looking like a safe haven. ETF flows confirm this: the iShares US Treasury ETF attracted inflows for a second consecutive month, while the iShares Core S&P 500 ETF swung from inflows last month to outflows. Still, policy anxietyrelated to the Fed, the Treasury and electionscontinues to suppress demand for long-end US Treasuries. The Fed's decision to hold rates steady triggered a Treasury selloff, reigniting doubts about whether Chair Kevin Warsh is committed to the central bank's 2% inflation target. On Thursday, long-end European government bonds also fell. Investors interpreted comments by ECB President Christine Lagarde as indicating the central bank would not intervene to stem the selloff triggered by French political and fiscal turmoil. "I'd rather call this a pause than a turning point, because the pressures behind this year's selloff haven't disappeared," said Hilary Wynn, investment director at AJ Bell. "We still favor high quality and shorter duration rather than chasing the long-bond rally." Next month's US midterm elections give even bond bulls reason for caution. A divided Congress could restrain fiscal expansion, benefiting long-end Treasuries; while Republicans unexpectedly holding both chambers could reignite the spending-versus-inflation debate. Meanwhile, an economic slowdown and safe-haven flows could push yields lower, while looser fiscal policy or an escalation of war driving inflation higher could trigger another selloff, said Oliver Faizallah, head of fixed income research at Raymond James Wealth Management. It is "hard to put a reasonable fair value" on the long end of the Treasury market, Faizallah said. Nevertheless, the October pullback in yields gives US Treasury Secretary Scott Bessent some breathing room ahead of his department's quarterly refunding statement. The statement will unveil borrowing plans. After 30-year Treasury yields surged to the highest since 2002, speculation has grown that the US might cut issuance of 20- and 30-year bonds. The rally has reduced the urgency of such discussions, though many banks still expect such adjustments could come in 2027. The appeal is not limited to the US. Higher yields are drawing buyers into Japanese long bonds; German Bunds are benefiting from safe-haven flows triggered by French turmoil. In the UK, the Bank of England's reduction in long-bond issuance, combined with improved market sentiment toward Prime Minister Andy Burnham's new government, has helped long-dated gilts outperform. Royal London Asset Management has shifted to overweight 30-year UK gilts over the past few months. Craig Inches, the firm's head of rates and cash, has been telling clients that now is the right time to extend duration. "We've seen bond yields go higher, higher and higher," Inches said.