Aegon "stubbornly" counters the U.S. Treasury Department: Increasing long-term bond repurchases has "little significance," and the logic of steepening remains unchanged.

Despite U.S. Treasury Secretary Scott Basset's efforts to curb long-term bond yields, Aegon Asset Management remains firmly committed to betting that the spread between short-term and long-term borrowing costs in the U.S. will continue to widen. On Wednesday, the U.S. Department of the Treasury announced it would at least double the size of its liquidity support repurchase operations for 10- to 30-year Treasuries, raising the maximum limit for a single repurchase from $2 billion to at least $4 billion. Following the announcement, the bond market reacted positively, with the yield on the 10-year U.S. Treasury falling 6 basis points to 4.65% and the 30-year yield dropping nearly 10 basis points to 5.18%. The previous trading day saw the 30-year yield briefly surpass 5.33%, marking a new high since 2007. However, according to Aegon portfolio manager James Lynch, the expansion of long-term Treasury repurchases is of limited significance and will not sway his view that the yield curve in the U.S. and Europe will continue to steepen. Following the Treasury's announcement to expand repurchases, the U.S. Treasury yield curve flattened. Data shows that Aegon's Absolute Return Bond Fund has outperformed 80% of its peers over the past month. Lynch stated that one of their successful strategies is based on betting that the rise in 30-year Treasury yields will outpace that of 5-year Treasuries due to multiple structural factors. Lynch commented, Fiscal issuessuch as a massive budget deficit, the impact of large corporate debt flooding the market, inflation remaining above target levels, and unclear communications from the Federal Reserveall inject additional premiums into the market. I do not believe these factors will disappear anytime soon. Globally, steepener trades are increasingly favored by hedge funds and other asset management institutions. The core logic behind this is that as the supply of government bonds continues to increase, long-term yields must rise further to attract sufficient buyers. Long-term bonds have become a focal point of high investor interest. On one hand, inflation pressures persist; on the other, the debt-driven AI boom has created competition between the government and high-rated, large-scale financing tech giants (i.e., super-large corporations) for buyers in the same market. Currently, the yield on the 30-year Treasury has surpassed 5%, reaching its highest point in nearly two decades. Meanwhile, short-term yields have seen a narrowing increase over the past month, as market signs suggest the Fed is not in a hurry to raise interest rates. Aegon's bond fund, with a size of 165 million (approximately $225 million), has returned 2.36% so far this year, with earnings coming from its short-term bond allocations, active duration management, and steepening trades. Lynch adopted the steepening trade strategy for U.S. Treasuries back in mid-June. Additionally, he bets that the performance of long-term bonds in Europe and the UK will lag behind that of short-term bonds. He is considering gradually transitioning the steepening positions to direct holdings of long-term bonds as they approach 2027 but remains cautious about timing direct bets on rising bond prices. Right now, things are a bit chaotic, but I think this might be a good opportunity to go long, Lynch said. Unfortunately, no one will ring the bell and tell you, Thats right, now is a good time to go long. How does Wall Street view the new Treasury buyback policy? After the U.S. Department of the Treasury took action, the U.S. Treasury market saw a rebound. Nevertheless, opinions on this buyback adjustment remain divided on Wall Street. J.P. Morgan stated outright that the Treasury's expansion of buybacks is a band-aid solution. J.P. Morgan strategists, including Jay Barry, pointed out that this operation essentially only addresses the symptoms of rising long-term yields and does not tackle the fundamental issues: the U.S. economy is nearing full employment, the budget deficit still accounts for about 6% of GDP, and the persistent high demand for financing is the core reason for the pressure on long-term rates. The bank warned that if the Treasury becomes more opportunistic in debt management and deviates further from the principles of regular and predictable issuance, investors may actually demand higher term premiums, ultimately driving up long-term financing costs. J.P. Morgan forecasts that the U.S. financing gap will exceed $3.5 trillion over the next few fiscal years, and unless significant fiscal consolidation is achieved, the impact of this buyback adjustment on long-term rates is likely to be temporary. Barclays believes that while the actual market impact may be limited, the policy signal should not be overlookedinvestors are now clearly aware that if long-term yields continue to rise, the U.S. Treasury is willing to adjust the issuance structure. In the future, the Treasury could further increase the buyback scale or explicitly reduce long-term Treasury issuance during its financing meetings in November. However, the bank cited the experience of Japan as a reminder that cutting long bond supply is merely a way to buy time; after Japan reduced its issuance of ultra-long bonds in 2025, the yield on 40-year bonds initially dropped by about 50 basis points but then reached new highs. Ultimately, to truly solve the problem, fiscal consolidation must resume. In contrast, Citigroup holds a more optimistic stance. The bank recommends buying 20-year U.S. Treasuries, believing that the Treasury's recent moves aim to limit the rise of long-end yields and judging that there is a strong potential for a rebound in the Treasury market in the coming months, especially with inflation cooling down. From Aegon's firm bet on steepening to J.P. Morgan's band-aid solution warnings, and to Citigroup's optimistic positioning, it indicates that the market's struggle over the direction of U.S. Treasury rates is far from reaching a conclusion.