By Harry Robertson
LONDON (Reuters) — Bond traders are eyeing a return to a type of trade that left them battered earlier this year — betting on yield curves returning to a more normal shape as slowing economies force central banks to cut interest rates.
The shape of the yield curve has been in the spotlight over the last week, with U.S. and European 10-year bond yields rising sharply compared to their shorter-dated peers.
Those moves have put the focus back on «steepening trades» — bets that shorter-dated yields will fall relative to longer-dated yields. Many investors say the big rush into such wagers will come when central banks look poised to cut interest rates to bolster growth.
In these trades, investors buy a short-dated bond in the hope that its price will rise and the yield will fall, and short — that is, bet against — a longer-dated bond for the opposite reason. They are likely to use futures contracts, which make it easier to bet on the direction of assets.
«Everyone is now re-looking at these curve trades,» said Olivier De Larouziere, chief investment officer for global fixed income at BNP Paribas (OTC:BNPQY) Asset Management.
The renewed interest comes as the U.S. Federal Reserve and European Central Bank get close to the end of their aggressive rate-hiking cycles, potentially bringing two years of bond-market suffering to a close.
«It's a typical end-of-cycle trade,» said Fabio Bassi, head of international rates strategy at JPMorgan (NYSE:JPM). «I would expect that in the next quarter, more people will start positioning for a steepening of the yield curve.»
A PAIN TRADE
Central banks' rate hikes have pushed up yields on short-dated bonds, which are highly sensitive to short-term borrowing costs.
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