Morgan Stanley Investment Management's head of fixed income, Vishal Khanduja, has been reducing bearish positions on long-term US Treasuries, citing Treasury Secretary Scott Bessent's commitment to prevent yields from rising "at all costs." Khanduja, who has delivered strong performance, has trimmed his exposure to yield curve steepening trades, which bet on the spread between 30-year and 5-year Treasury yields widening, as he believes the upside potential for this trade has diminished.
"It becomes difficult to maintain significant steepening positions in your portfolio because you now have a non-economic buyer at the long end," Khanduja explained in an interview. This buyer is the US Treasury Department itself. Last week, the Treasury announced plans to at least double the size of its buyback program for existing bonds (spanning 10- to 30-year maturities) in an effort to prevent borrowing costs from escalating further. Since the announcement, the yield spread between 5-year and 30-year Treasuries has narrowed by approximately 10 basis points.
"Scott Bessent is essentially showing his hand," Khanduja stated, characterizing the Treasury Secretary's actions as an "at all costs" moment, drawing a parallel to former European Central Bank President Mario Draghi's 2012 pledge to defend the euro. Draghi's intervention ultimately helped bring an end to the European sovereign debt crisis. Khanduja, who co-manages the $4.4 billion Eaton Vance Total Return Bond Fund with Brian Ellis, has achieved an annualized return of 3.2% over the past decade—roughly double that of the Bloomberg US Aggregate Bond Index. According to Morningstar data, the fund has outperformed approximately 97% of its peers during this period. As of Monday, the fund is up about 0.3% this year, while the benchmark index has declined 0.2%.
Bessent's unexpected plan, announced just two weeks after the Treasury's previous buyback schedule release, provides market support by reducing long-dated debt supply. Barclays strategists estimate that the expanded buyback program could total $64 billion annually, representing approximately 15% of the current yearly supply of 20-year and 30-year Treasuries. Khanduja describes this as "quantitative easing-like" intervention, noting that it could also boost risk assets since the Treasury is removing duration risk from the market. Consequently, he has increased positions in investment-grade corporate bonds, reduced holdings in lower-risk mortgage-backed securities, and positioned for dollar weakness against high-yield emerging market currencies.
Bessent's move has attracted criticism and skepticism about its lasting impact. Persistent concerns include inflation, fiscal deficits, and the bond market's already substantial debt supply from technology companies financing artificial intelligence infrastructure. Bessent's former mentor, renowned investor Stanley Druckenmiller, labeled the intervention a mistake in a recent opinion piece. Strategists at Deutsche Bank, JPMorgan, and Goldman Sachs also anticipate the yield curve will continue to steepen as long-term yields eventually rise. Khanduja expects the Treasury's intervention to limit gains from the "steepening trade" that fund managers had been pursuing. Beyond buybacks, Bessent has hinted at potentially reducing long-term debt issuance and has taken measures perceived as easing pressure from Japanese selling of US Treasuries.
"This is a series of unconventional measures," Khanduja said. "The signal being sent is extremely strong." He added that the Treasury could also shift borrowing toward shorter-dated notes or encourage banks to purchase more government bonds. "You need that 'at all costs' determination to curb this momentum," he concluded.