At Barclays, Kevin Walter -- co-head of global Treasuries trading -- says he’s holding a small position in bear steepeners when he would ordinarily have a bigger one to reflect his view that the economy is on the right track, given prospects for a vaccine and fiscal stimulus.
“One thing holding me back is the possibility that, as soon as this next FOMC meeting, the Fed could be extending WAM,” or the weighted average maturity, of its purchases.
If that happens, it would cause longer maturities to outperform, creating an opportunity to put on more bear-steepener trades from a better level, he says. Even so, he sees a policy shift by the Fed as more likely next quarter.
Janus Tip-Toes
Maroutsos at Janus, which managed about $350 billion as of September, says he “tip-toed” into a mild steepener earlier this year, and refrained from adding more in the Absolute Return strategies he helps oversee, partly because he viewed it as a crowded trade that could unwind “fast and violently.”
“We weren’t firm believers the curve would steepen anyway, and it’s been hard for us to get on board,” he said. “There are too many extenuating circumstances that could result in that trade being hurt,” such as renewed lockdowns and the prospect that a fiscal package doesn’t get passed.
Many traders began paring steepener bets last month as they reassessed the potential for more support from the Fed.
Leary of Incapital says he pulled back on the popular trade to take profits in early November, when the 10-year Treasury yield approached 1%, and positioned instead for more flattening. He’s now expressing his optimistic views on the economy via a synthetic trade that mimics the steepener -- buying puts on 10-year options and calls on 2-year options, which have built-in stop outs “if I get it wrong.” He sees the 10-year yield falling to as low as 0.65% to 0.75% if the Fed tweaks its bond buying this month.
Hot Topic
The Treasury’s decision not to extend some emergency Fed lending programs past year-end increased expectations that policy makers will act soon. Yet recently, somewhat more optimistic comments about the economy from Powell seem to have removed some of that urgency.
Even if the central bank doesn’t act next week, the U.S. faces a tough stretch ahead with the pandemic. All else equal, that should bolster demand for Treasuries, lowering yields -- and make steepeners a riskier place to be through at least the year-end.
Caution toward steepeners has “definitely been a topic of conversation” among portfolio managers at Insight Investment, which oversees about $945 billion, says Jamie Anderson, head of U.S. trading, adding that the Fed can’t be blamed for putting the economy above traders.
The steepener is “definitely a position that everyone loves,” Anderson says, but there’s a lot at stake over the next few weeks. “You could ultimately be right, but the events before you get there could be extreme and everyone has a limit somewhere.”
-With assistance from Alyce Andres, Edward Bolingbroke and Christopher Condon.
This article was provided by Bloomberg News.