Popular US Treasury Bet Risks Being Next Pain Trade, BNP Warns

BNP Paribas suggests that investors betting on further steepening of the US Treasury yield curve, particularly through shorting long-dated bonds, risk losses as the market is already pricing in fiscal concerns. According to BNP Paribas, 30-year Treasuries could rebound if auction demand is strong or deficit fears ease, and the bank sees the steepener trade as overly crowded, with market bias at a decade high; they are recommending a trade that profits if long-dated rates outperform amid a broader rate decline.

Analysis

BNP Paribas SA presents a contrarian view on the US Treasury market, suggesting that investors betting on continued steepening of the yield curve—specifically through rising long-dated yields relative to shorter notes—face potential losses. Guneet Dhingra, head of US rates strategy at BNP, posits that 30-year Treasuries have already priced in the worsening US fiscal outlook and could rebound on strong auction demand or an easing of deficit concerns, making current levels attractive for buying. This stance directly opposes major firms like DoubleLine Capital and Pacific Investment Management, who favor shorter maturities. BNP's analysis indicates the market bias for curve steepeners is at a decade high, signaling an overly crowded and potentially vulnerable 'pain trade'. Long-dated yields have risen since early April, with the 30-year yield peaking at 5.15% on May 22 (highest since 2023) before retreating to around 4.92%, driven by budget deficit concerns and trade tensions, while Federal Reserve rate cut prospects have anchored the short end. Despite market anxiety surrounding events like the upcoming $22 billion 30-year auction, Dhingra notes that demand at recent 10- and 30-year auctions has been 'decent,' with foreign demand aligning with long-term averages, countering fears of overseas buyers shunning US debt. Consequently, BNP Paribas recommends an options-based trade designed to profit if long-dated interest rates outperform amidst a broader decline in rates, asserting that while fiscal concerns persist, 'a lot of the skepticism and concern is in the price.'

Key Decisions for Investors

• Investors heavily positioned in yield curve steepener trades should critically reassess their exposure, given BNP Paribas's view that this strategy is overly crowded and may represent a 'pain trade'.
• Closely monitor the results of the upcoming $22 billion 30-year Treasury auction, as strong demand could support BNP's thesis and lead to a rally in long-dated bonds, while a weak auction could exacerbate fiscal concerns.
• Consider exploring strategies, such as the options-based trade suggested by BNP Paribas, that could benefit from outperformance in long-dated Treasuries, especially if anticipating a broader decline in interest rates or a reversal in the crowded steepener positioning.
• While BNP Paribas suggests fiscal concerns are largely priced into long-dated Treasuries, maintain vigilance regarding the US fiscal situation and evolving trade dynamics, as these remain underlying risk factors for bond markets.