The bond market’s most popular trade – betting on a steeper yield curve – has reached its most lopsided positioning in at least a decade, according to BNP Paribas data. This extreme crowding raises alarm bells for potential violent unwinds.
The Dangerous Allure of Steepeners
Curve steepener trades, which wager that long-term Treasury yields will rise faster than short-term rates, have attracted major players including DoubleLine Capital and PIMCO. The strategy has gained traction as:
- 30-year yields peaked at 5.15% in May (highest since 2023)
- Fed rate cut expectations anchor short-end rates
- Budget deficits and trade tensions push long yields higher
“The steepener is large, but not beautiful,” warned Guneet Dhingra, BNP’s head of US rates strategy. “In current market configuration, this could become a painful trade.”
$22 Billion Test Ahead
Thursday’s critical 30-year Treasury auction presents the next inflection point, with yields currently hovering near 4.912%. Market participants remain nervous after recent volatility.
“Every auction now is a risk event,” Dhingra noted. “A good auction might just meet expectations, but a weak one could force investors to fundamentally reassess US fiscal health.”
Contrarian Perspective
BNP challenges the prevailing bearish narrative, observing:
- Strong 10-/30-year auction demand since April’s tariff announcements
- Foreign buyer participation matching long-term averages
- Substantial fiscal concerns already priced in
“I’m not saying fiscal worries have disappeared, but considerable skepticism is already reflected in valuations,” Dhingra emphasized.
Strategic Recommendations
The French bank advises option-based strategies to position for long-end outperformance in a potential rate decline scenario. It sees value in 30-year bonds at current levels, especially if:
- The upcoming auction shows robust demand
- Deficit concerns moderate
- Market technicals improve
This contrarian call comes as the Treasury market braces for potential turbulence, with crowded positioning increasing the risk of sharp reversals should sentiment shift unexpectedly.
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