Core Insights - Despite political instability in Japan, Vanguard Asset Management maintains its investment strategy, anticipating potential profits if the Bank of Japan raises interest rates and flattens the yield curve [1] - Vanguard's International Rates Head, Ales Koutny, is preparing for a possible rate hike in December, adjusting positions by shorting short-term bonds while buying long-term bonds [1] - This stance contrasts with the prevailing market sentiment, which expects the Bank of Japan to maintain its current policy for a longer period due to political uncertainties [1] Group 1 - Koutny believes the market is underestimating the timing of the next rate hike, creating opportunities for repositioning trades [2] - He estimates a 50% probability of a rate hike this month, acknowledging that political turmoil may delay it until December [1][2] - Current market expectations show only a 23% probability of a rate hike at the October 30 meeting and a 62% probability by December 19 [1] Group 2 - Koutny has increased bets on rising two-year swap rates and added a new trade of shorting five-year Japanese government bonds while going long on 25-year bonds [2] - The yield spread between five-year and 30-year Japanese government bonds is currently about 190 basis points, down from a peak of 216 basis points last month [5] - This spread is significantly higher than the approximately 140 basis points before the last rate hike in January, indicating potential for narrowing before the next hike [5] Group 3 - Koutny has long advocated for a flattening of the Japanese yield curve and has increased holdings in long-term Japanese government bonds [6] - Despite the lack of returns from this strategy since the Bank of Japan paused rate hikes in January, Vanguard remains committed to its positions [6] - RBC BlueBay Asset Management, also bullish on long-term bonds, has taken a direct short position in 10-year Japanese government bonds to hedge against risks in their yield curve flattening trades [6]

Group 1 - The global long-term bond market is experiencing a rebound as investors seek buying opportunities after a sell-off, with U.S. and Japanese 30-year bond yields dropping approximately 20 basis points since early September, and UK yields falling over 10 basis points [1] - The recent decline in long-term bond yields is partly driven by reduced supply, as some countries shift their issuance focus to cheaper short-term bonds, with Japan proposing to cut long-term bond issuance and the UK central bank reducing long-term bond sales in its quantitative tightening plan [1][2] - There is a growing optimism in the long-term bond market, highlighting the significant role of supply concerns in recent sell-offs, despite ongoing worries about rising fiscal deficits [2] Group 2 - Strong economic growth globally is alleviating concerns about fiscal deficits and prompting investors to reconsider long-term interest rate trends, with recommendations for Australian investors to adopt positions that benefit from a flattening yield curve [3] - The Bloomberg Global Aggregate Index indicates that bets on long-term bonds are starting to pay off, with 10-year and longer bonds returning 0.7% this month, outperforming shorter-term bonds [6] - Recent auctions show strong demand for long-term bonds, with Japan's 40-year bonds seeing enthusiastic buying and the strongest demand for 20-year bonds since 2020 [6]

Core Viewpoint - The Federal Reserve's decision to maintain its current stance is deemed correct in light of strong non-farm payroll data, which contrasts with recent weak economic indicators [1] Group 1: Economic Data Analysis - Strong non-farm employment report indicates resilience in the labor market, overshadowing recent weak economic data [1] - Hard data is perceived as more reliable than soft data in the current economic context, suggesting a positive outlook for the economy [1] Group 2: Market Implications - Market changes are leading to a flattening of the yield curve, which may continue as popular steepening trades are unwound [1] - The current market dynamics reflect a shift in investor sentiment and strategy in response to economic data [1]

Core Viewpoint - US Treasury futures prices fell to intraday lows, with 2-year to 5-year Treasury yields rising by more than 10 basis points on the day [1] Summary by Relevant Categories Market Performance - Yields generally increased by 6 to 10 basis points, indicating a trend of rising interest rates [1] - The yield curve flattened, with the 2s10s and 5s30s spreads narrowing by 3 basis points and 4 basis points respectively [1]

Group 1 - The core point of the article highlights the flattening of the U.S. Treasury yield curve following the release of non-farm payroll data, with the latest spread between the 2-year and 10-year yields reported at 45.9 basis points, down from 49.1 basis points prior to the data release [1]