‘Big War’ in Bonds Escalates as Treasury Rift Puts Fed in Play

The tide in the $20 trillion Treasury market appears to be turning in favor of the bulls for now, with expectations growing that the Federal Reserve will boost purchases of longer-maturity debt as soon as next month.

U.S. government debt just logged its best week since August after the Treasury demanded the Fed return unused funds from emergency lending programs, a request the central bank said late Friday it would comply with. The development bolstered Wall Street predictions that the Fed will unveil more monetary action when it meets in mid-December.

Strategists are coalescing around the Fed tilting its $80 billion of monthly Treasury purchases more toward longer-term obligations in a bid to buoy the economy as coronavirus cases surge and as fiscal-stimulus talks have stalled out. That backdrop is helping cap long-term rates, in a blow to the reflation trade in bonds -- namely, bets on a steeper yield curve, which have struggled even after positive vaccine news.

Traders in tug of war over outlook

“There’s a big war going on in bonds,” said Jack McIntyre, who helps oversee about $62 billion at Brandywine Global Investment Management. “With the vaccine news bonds should be selling off, but that hasn’t held. The market’s expectations for Fed action is what is keeping bonds from selling off.”

Longer maturities were last week’s best performers. The yield curve from 5 to 30 years, which on Nov. 4 reached its steepest level since 2016, has flattened to levels last seen in September.