Aegon "confronts" US Treasury: Long bond repurchase expansion has "limited significance", yield curve steepening logic unchanged

According to Zhitong Finance APP, despite US Treasury Secretary Scott Besant's attempts to suppress long-term bond yields, Aegon Asset Management remains firm in its bet that the spread between US short-term and long-term borrowing costs will continue to widen.

The US Treasury announced on Wednesday that it will "at least double" the size of its liquidity support repurchase operations for 10-to-30-year Treasury bonds, raising the single-operation cap from $2 billion to at least $4 billion. Following the announcement, bonds responded positively, with the 10-year US Treasury yield falling by 6 basis points to 4.65%, and the 30-year yield dropping nearly 10 basis points to 5.18%. On the previous trading day, the 30-year yield had briefly broken above 5.33%, marking a new high since 2007.

However, according to Aegon's portfolio manager James Lynch, expanding the long-term Treasury repurchase scale is "of little significance" and does not change his view that both US and European yield curves will continue to steepen.

US Treasury yield curve flattens after Treasury announces expanded repo operations

Data shows that Aegon's Absolute Return Bond Fund has outperformed 80% of its peers over the past month. Lynch stated that one of his successful strategies is to bet, based on “multiple structural factors,” that the yield on 30-year Treasuries will rise faster than that of 5-year Treasuries.

Lynch added: “The fiscal issues—massive deficits, the impact of ultra-large corporate debt flooding the market, inflation still above target, and the Federal Reserve’s lack of clear communication—all inject extra premium into the market. I don’t believe these factors will disappear anytime soon.”

Globally, steepener trades are increasingly favored by hedge funds and other asset management institutions. The core logic: as government bond supply keeps rising, long-term yields must increase further to attract enough buyers.

Long-term bonds have become a major focus for investors. On one hand, inflationary pressures persist; on the other, the debt-driven AI boom has governments and those high-rated, mega-financing tech giants (“ultra-large corporates”) competing for buyers in the same market.

Currently, the 30-year US Treasury yield has broken above 5%, the highest level in nearly two decades. At the same time, short-term yields have narrowed their gains over the past month, as market signals indicate the Federal Reserve is in no rush to hike rates.

Aegon’s bond fund, with assets of £165 million ($225 million), has achieved a 2.36% return so far this year, with gains coming from short-term bond allocations, active duration management, and steepener trades. Lynch adopted the US steepener trade strategy as early as mid-June. He has also bet on long-term bonds in Europe and the UK underperforming their short-term counterparts.

He is considering gradually shifting his steepener positions to outright long-term bond holdings as we approach 2027, but remains cautious about the timing to directly bet on bond price increases.

“Things are a bit chaotic right now, but I think this might be a good opportunity to go long,” Lynch said. “Unfortunately, no one is going to ring a bell to tell you, ‘Yes, now is the time to go long.’”

How is Wall Street viewing the new US Treasury repo policy?

The US Treasury’s actions sparked a rebound in the Treasury market. Nevertheless, Wall Street remains divided on the impact of this repo adjustment.

J.P. Morgan stated bluntly that the Treasury’s expanded repo operations are a “band-aid, not a cure.” Analysts including Jay Barry argued that this move essentially addresses only the “symptoms” of rising long-term yields, rather than the root problem—the US economy is close to full employment, the fiscal deficit is still around 6% of GDP, and persistently high funding demand is the core reason behind long-end rate pressure. The bank warns that if the Treasury adopts a more “opportunistic” approach to debt management, further straying from the traditional “regular and predictable” issuance, investors might in turn demand higher term premia, ultimately pushing up long-term funding costs. J.P. Morgan estimates that the US funding gap will exceed $3.5 trillion in the coming fiscal years, and unless substantial fiscal consolidation is implemented, the impact of this repo adjustment on long-term rates is likely to be only temporary.

Barclays believes that while the actual market impact is limited, the policy signal is notable—investors are now clearly aware that if long-end yields continue to rise, the US Treasury is willing to adjust issuance structure. In the future, the US Treasury could further increase repo operations or announce reductions in long-term bond issuance at the November refunding meeting. However, citing Japan’s experience, the bank cautions that cutting long-end supply only buys time. After Japan’s 2025 super-long bond reduction, the 40-year yield fell about 50 basis points, but soon hit new highs again. Ultimately, the real solution still lies in fiscal consolidation.

By contrast, Citi holds a more positive view. The bank recommends buying 20-year US Treasuries, believing the Treasury’s move is intended to limit long-term yield rises and that, combined with cooling inflation, there are strong opportunities for a Treasury rebound in the months ahead.

From Aegon’s resolute steepener bet, through J.P. Morgan’s “band-aid, not cure” warning, to Citi’s optimistic positioning, it is clear that the market’s battle over the future path of US Treasury yields is far from over.