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The Tell: 30-year Treasury remains `sweet spot’ for investors ready to buy the long bond on any opening created by Fed’s Powell

The 30-year Treasury bond, long overshadowed by its 10-year counterpart, is turning into something of a sweet spot for long-term investors, who are looking for another opportunity to buy the long bond from the Federal Reserve’s Wednesday afternoon policy update.

Traders expect Fed policy makers to raise rates next year by more than previously thought due to persistent inflation. And investors like portfolio manager Eric Vanraes of Eric Sturdza Investments in Geneva are interested in buying more of the 30-year bond to reflect their view that the central bank would be committing a policy mistake by tightening too late and too aggressively as growth slows. The long bond, as with all Treasurys, is traditionally seen as a haven.

“For many people like me, the 30-year bond is the sweet spot,” Vanraes said, in a phone interview. “Inflation is not an issue for this maturity, and it’s a less-crowded trade than the 10-year note.”

Vanraes’ asset-management firm, which oversees $2.8 billion, and many other long-term investors are driven by the firm belief that slowing growth is a bigger problem than inflation right now. In addition, the reduced availability of the 30-year bond in the future is making it more attractive for them to keeping buying it sooner rather than later. Bond prices and yields move in opposite directions, so that the continuing buying of the 30-year keeps pushing down its yield — a dynamic that’s played a crucial role in the Treasury market’s recent volatility.

Wednesday morning’s moves in the U.S. bond market ahead of the Fed policy announcement reflected that dynamic, with the 30-year yield
TMUBMUSD30Y,
1.940%

falling to around 1.95%, while the 5-year note yield
TMUBMUSD05Y,
1.188%

rose on rate-hike expectations — flattening the Treasury curve in a worrisome sign of potential economic trouble. Parts of the curve are already inverting, with the 20-year yield rising above the 30-year rate, for example.

Meanwhile, Dow industrials
DJIA,
-0.39%
,
the S&P 500
SPX,
-0.12%
,
and Nasdaq Composite indexes
COMP,
+0.08%

struggled for direction ahead of the release of the Fed’s policy statement at 2 p.m. Eastern time and Powell’s news conference at 2:30 p.m. Stocks have rallied ahead of the Fed announcement, however, brushing off the curve flattening. All three indexes closed at records on Tuesday for a third consecutive session.

On Wednesday, the Fed is expected to lay out its plan to begin scaling back monthly asset purchases. Investors will be focused on how the central bank’s policy statement characterizes inflationary pressures and economic growth, as well as whether Powell pushes back against rising rate-hike expectations and stresses the need for flexibility with the central bank’s policies.

Read: 5 things to watch for when Fed meets Wednesday

The risk for Powell is that he inadvertently extends the Treasury market’s recent volatility by telegraphing a readiness to either taper or hike rates faster than many anticipated — or, at the very least, lets investors draw their own inferences.

Strategists at BMO Capital Markets and Standard Chartered Bank, along with a team at BofA, are among those who have flagged the possibility that Powell’s remarks will be interpreted in such a way that leads to the continued flattening of the curve.

Tom Garretson of RBC Wealth Management said there’s even a risk in what Powell doesn’t say, such as if the Fed chairman fails to sufficiently “divorce” the tapering timeline from the rate-hike timeline.

Vanraes said he’s been buying the 30-year bond ever since Powell’s Jackson Hole speech in August and is standing by to purchase more on Wednesday, as well as in 2022 if the yield gets down to 1.5% or 1.25% next year. That’s because he sees a lack of growth as a bigger problem than inflation, which should “decelerate at some point because you can’t have much inflation without much growth.”

His view is that the Fed should delay the start of tapering until December, and then remain in a wait-and-see mode on rate hikes. Meanwhile, he says, “the long end is an investment opportunity, so we are already preparing for 2022. Each time there’s weakness in the 30-year rate, we buy more of the 30-year because it’s less dangerous than the 10-year, which is too volatile and driven by hedge funds.”

Read: Hedge funds seen facing heavy losses amid wrong-way Treasury bets ahead of Fed tapering, traders say

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