Wall Street Falls Hard for Once-Unloved 20-Year Treasury Bonds

Bond investors who have repeatedly gotten burned buying 20-year Treasuries since the US government reintroduced them in 2020 appear willing to conclude that this time will be different.

PGIM Fixed Income is among fund managers looking to capture windfall profits by snapping up 20-year bonds, whose extra yield over its 30-year peer is hovering at about 15 basis points. The asset managers expect to make money as that gap narrows — sparked by the Treasury’s issuance plans and expectations the Federal Reserve is near the end of its tightening cycle.

Since their relaunch, 20-year bonds have been plagued by sub-par demand relative to bigger initial auction sizes, leading their yields to tend to trade above those on both 10- and 30-year Treasuries. That underperformance, however, has been reined in as Treasury cut the supply of the 20-year from late 2021 through November last year. Then last week it said that amid plans to boost auctions, it would lift the 20-year by a smaller degree.

Ten-year notes traded at about 4.01% Wednesday, after a sale of the debt as part of the Treasury’s refunding round. Meanwhile, the 20-year yielded 4.33% and the 30-year about 4.18%.

“You want to own as much of the 20-year Treasury as you can get your hands on,” said Michael Collins, a fund manager at PGIM. Twenty-year debt is trading “cheap and you’re going to monetize that if you short 10s, 30s and go long 20s.”

20 Year Bonds Have Higher Yields