A broad-based sell-off in the U.S. Treasury market is accelerating as commodity trading advisors, asset managers, and Japanese investors simultaneously unwind their positions, a May 19 Bank of America report showed.
"The U.S. rates market is undergoing a significant positioning unwind," the bank's U.S. rates research team said in the report, noting that bulls have "capitulated."
The selling is widespread. Japanese private investors sold $18 billion in U.S. Treasuries in February and another $14 billion in March, according to data from Japan's Ministry of Finance. Meanwhile, systematic CTA funds have pushed their short positions to their limits across the curve, with a recent focus on selling longer-duration bonds.
The most significant risk ahead is a potential large-scale currency intervention by Tokyo, which could force the sale of $40 billion to $50 billion in U.S. Treasuries to support the yen, creating a major headwind for bond prices. BofA strategists estimate a recent suspected intervention to prop up the yen totaled $72 billion, implying a massive potential bond sale.
All Outflow, Some Inflow
While the headline positioning shows a bearish consensus, higher yields are attracting some capital. U.S. fixed-income funds saw inflows of $18 billion last week, double the 12-week average.
However, the capital is flowing selectively into short-term government debt and investment-grade corporate bonds. Long-term Treasury funds were the only category to experience outflows, signaling a clear preference for shorter duration among investors who are re-entering the market.
Absorbing the supply from the sell-off are primary dealers and U.S. domestic banks, which have increased their holdings of Treasury and agency debt in recent months.
This article is for informational purposes only and does not constitute investment advice.
