Strategists at Societe Generale have recommended gradually building long positions in 2- to 5-year US Treasury bonds, citing that "yields at the front end are near their yearly highs, and the carry remains attractive."
Following a recent surge in oil prices triggered by the breakdown of a US-Iran war ceasefire last week, yields on 2- to 5-year Treasuries climbed on Monday to their highest levels since 2026.
"While geopolitical risks may persist, yields near the upper end of recent ranges could entice investors to gradually build long positions," stated Societe Generale strategists including Subadra Rajappa in a July 9 report.
They noted that whether the Federal Reserve will follow through on the rate hikes already priced in by markets will hinge on inflation trends, with policymakers still divided on the necessity for further tightening.
Concurrently, with the recent escalation in the Iran conflict and a concurrent sell-off in global bond markets, longer-term yields "are likely to remain elevated."
Below is a summary of other interest rate strategy views released since late last week.
Bank of America (Mark Cabana et al., July 10 report)
Positioning remains for a more hawkish Federal Reserve reaction function compared to current market pricing, including shorting front-end duration and betting on a flatter yield curve. Examples include shorting 2-year Treasuries, 2s10s flatteners, and 1y1y vs. 1y9y real yield flatteners.
"A more hawkish Fed reaction to inflation should support real yield flattening trades; these trades offer more favorable carry and roll-down compared to nominal rates."
Nevertheless, a July rate hike remains unlikely unless the market-implied probability approaches 80% following the release of the June CPI report.
BMO Capital Markets (Ian Lyngen et al., July 10 report)
"Treasuries remain oversold, setting the stage for either strong buying or an extended period of consolidation. We favor the former and see ample room for yields to retreat from current elevated levels."
They anticipate a decline in the market-implied probability of a July hike based on this week's June CPI data and congressional testimony from Federal Reserve Chair Kevin Wash.
BMO recommended establishing a 2s10s flattener at 31.5 basis points on July 1, targeting 15.9 basis points with a stop at 40.5 basis points. While the trade is currently underwater, "our near-term flattening bias remains unchanged, and we would not oppose adding to the position if the 2s/10s spread approaches recent steepening levels."
The Fed's reduced forward guidance "should increase volatility and term premium at the front end of the curve," while its emphasis on returning inflation to the 2.0% target "should also offset upward pressure on the 10-year term premium."
Sumitomo Mitsui Banking Corporation (Joseph Abate, Monty Gandhi, Troy Ludtka, July 10 report)
"With yields currently near the upper bounds of recent ranges, the risk-reward is becoming increasingly favorable for investors looking to add duration."
Risks such as bond supply, a hawkish Fed, and geopolitical headwinds are "largely priced in," and "any seasonal volatility compression in July should present a buying opportunity."
They favor structures like 3m5y or 6m5y, but "given market volatility and uncertainty, investors should be cautious with long positions and prepared to take profits more swiftly than usual."
TD Securities (Gennadiy Goldberg, Molly Brooks, July 10 report)
They maintain recommendations to receive July OIS, go long 2- to 5-year rates, and buy 10-year Treasury dips.
"We do not expect the Fed to hike, but market pricing for hikes may stay elevated as the Fed awaits more data," adding that "Fed uncertainty could keep 10-year yields in a 4.25% to 4.66% range in the near term."
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