Bond investors who have repeatedly lost money buying 20-year Treasuries since the U.S. government started reissuing them in 2020 are confident this time will be different.
Asset management firm PGIM Fixed Income is one of several fund managers looking to make windfall gains by buying 20-year bonds that yield about 15 basis points more than their 30-year counterparts. They expect to cash in as that gap narrows amid Treasury bond plans and expectations that the Federal Reserve will soon end its tightening cycle.
Why are investors betting on 20-year Treasuries?
There are a few reasons why investors are betting on 20-year Treasuries to rebound. First, the yield on 20-year bonds is about 15 basis points higher than on 30-year bonds. This is a significant spread, and it is unusual for the yield on shorter-term bonds to be higher than on longer-term bonds. This suggests that investors expect the yield on 20-year bonds to narrow the gap with the yield on 30-year bonds.
Second, the Treasury Department plans to increase the issuance of 20-year bonds in the coming months. This will increase demand for 20-year bonds and could help push their prices.
Third, the Federal Reserve is expected to end its tightening cycle soon. This could lead to lower interest rates, which would also be positive for 20-year Treasuries.
What are the risks of investing in 20-year Treasuries?
There are a few risks to consider before investing in 20-year Treasuries. First, the yield on 20-year bonds could widen the gap with the yield on 30-year bonds. This would mean that investors would lose money on their investments.
Second, the Treasury Department could reduce the issuance of 20-year bonds. This would reduce demand for 20-year bonds and could lead to lower prices.
Third, the Federal Reserve could decide to raise interest rates more aggressively than expected. This would also be negative for 20-year Treasuries.
Bottom line
Investors willing to take on some risk could consider investing in 20-year Treasuries. However, it is essential to know the risks involved before making an investment decision.
Additional Information on Yields
- The yield on a bond is the interest rate the bondholder receives in exchange for lending money to the bond issuer.
- The yield curve is a graph that shows the yields on bonds of different maturities.
- The Federal Reserve is the central bank of the United States. It is responsible for setting monetary policy and regulating the financial system.
Inflation is the rate at which prices for goods and services are rising.
