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

BNP Paribas is warning investors against betting on a continued steepening of the U.S. Treasury yield curve, arguing that 30-year bonds already reflect fiscal concerns and could rally if demand strengthens or deficit fears subside. Guneet Dhingra, head of US rates strategy at BNP, suggests that long-dated Treasuries may be a buying opportunity at current levels, implying the popular trade of shorting them is at risk of becoming a pain trade.

Analysis

BNP Paribas SA has issued a cautionary note to investors, suggesting that the prevalent market expectation for a continued rise in long-dated US Treasury yields relative to shorter-dated maturities—a yield curve steepening trade—risks becoming a 'pain trade.' According to Guneet Dhingra, BNP's New York-based head of US rates strategy, 30-year Treasuries have already substantially priced in concerns related to the worsening US fiscal situation. Dhingra posits that these long-dated bonds could experience a rebound if there is strong demand at upcoming auctions or if anxieties surrounding the fiscal deficit diminish, even suggesting that current levels may present a buying opportunity for 30-year Treasuries. This analysis implies that the consensus view on persistent steepening may be overcrowded and vulnerable to a reversal, particularly if market sentiment shifts or new data points emerge that ease fiscal concerns.

Key Decisions for Investors

• Investors engaged in trades betting on sustained increases in long-dated US Treasury yields should consider the risk of a reversal, as highlighted by BNP Paribas's analysis.
• Monitor upcoming US Treasury auctions for demand strength and track narratives around the US fiscal deficit, as these factors could trigger a rally in 30-year bonds.
• Evaluate the potential for a contrarian long position in 30-year US Treasuries, given BNP's view that current yields already reflect fiscal headwinds and may offer a buying opportunity.