SUPERNEWS

Macro

BofA: Surge in Long US Bonds, Fed Cuts Eyed by Nov

Investor interest in long-dated US bonds hits a year-high, driven by Fed's rate cut signals and a weak jobs report.

By Bill Bullington

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5/10, 09:51 EDT
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Key Takeaway

  • Investor appetite for longer-dated US bonds surges, with a BofA survey showing 49% of respondents view being long rates as their top trade.
  • Expectations for Fed rate cuts advance to November following Powell's less hawkish remarks and a soft US jobs report.
  • Global bond funds see largest inflows in over three years, indicating widespread bullish sentiment on duration across major economies.

Surge in Long-Duration Bond Appetite

Following the Federal Reserve's indication that interest rate hikes are off the table for the foreseeable future, with potential rate cuts on the horizon later this year, investor interest in longer-dated US bonds has significantly increased. A Bank of America (BofA) client survey highlighted a marked rise in the appetite for extending duration in investment portfolios, reaching the highest level in a year and nearing the peak since the inception of the survey in 2011. This shift in sentiment is largely attributed to Federal Reserve Chair Jerome Powell's recent less hawkish stance and a weaker-than-expected US jobs report, which collectively have led investors to anticipate a rate cut as soon as November.

High Conviction in Long Rates

The BofA survey, conducted between May 3 and 8, revealed a notable jump in confidence among respondents, with 49% identifying long rates as their highest-conviction trade of the year, up from 30% in April. This surge in conviction coincides with global bond funds experiencing their largest weekly inflows in over three years. Despite this growing enthusiasm for long-duration exposure, there remains a significant gap between investors' sentiment and their actual positioning, suggesting that many have yet to fully align their portfolios with their bullish outlook on duration.

Global Duration Sentiment and Currency Views

Investor bullishness on duration is not confined to the US alone; a global sentiment gauge has reached its highest point since 2021, reflecting a broader consensus on the likelihood of rate cuts by major central banks, including the European Central Bank and the Bank of England. Concurrently, BofA clients have expressed a bearish outlook on the Japanese yen, which has recently hit a three-decade low against the dollar. This sentiment is underpinned by skepticism regarding the effectiveness of Japan's foreign exchange interventions, with most respondents expecting the yen to weaken further.

Treasuries Rally and Market Outlook

The recent $25 billion 30-year Treasury auction saw a surprising stop through, indicating a strong demand for long-term US debt and setting the stage for a continued rally in Treasuries. The auction's success, characterized by high participation from direct and indirect bidders and a robust coverage ratio, underscores the market's bullish bias and the clearing of Treasury supply as positive indicators for bond prices. Looking ahead, investors are keenly awaiting the upcoming Consumer Price Index (CPI) report, which could further influence the trajectory of Treasury yields and investor strategies in the bond market.

Street Views

  • Bank of America Strategists led by Ralf Preusser (Bullish on long rates):

    "By setting a very high bar for further hikes, Powell triggered a dip buying mentality."