Halister News

(Bloomberg) -- Any sustained rise in Treasury yields will require a significant shift in long-term investors’ holdings, both domestic and foreign; potential triggers for these shifts would include strengthening economic data, which would trigger a quickening pace of Fed hikes and subsiding political risk, such as Brexit.

• Bloomberg bond forecasts show 2Y at 1.13% end-2016 vs current 0.78%; 10Y 2.14% vs current 1.71%; 30Y 2.97% vs current 2.52%

POSITIONING

• CFTC positioning data show asset managers in particular long 2Y and 5Y; leveraged funds net long Treasury bond futures
• If yields do rise, “it will be a significant position shift where people are getting out,” Todd Colvin, senior VP at Ambrosino Brothers, says
  • “Accounts will be part of the problem, though part of a bigger group. You need China or someone with a significant portion of bonds to move”
• There may be a lot of volatility around event risks in June and “the idea is if the hedge fund community is exiting, it’s going to get momentum,” says David Keeble, Credit Agricole strategist

FOREIGN DEMAND

• Depreciation of CNY may lead to capital outflows and UST selling to repatriate capital, Marty Mitchell, independent strategist, says
  • NOTE: China’s UST holdings $1.24t as of March; link to all TIC data; Foreign official Treasury holdings with Federal Reserve at $2.9t on June 1, off July 2015 high at $3.03t
• Demand from abroad has already waned in recent mos.; Keeble notes demand is driven by U.S. investors “coming home”
  • “There’s no yield in the world so you’re importing lower yields, not domestically generating higher ones”

TRIGGERS

• String of positive economic data would cause markets to price in a more aggressive Fed; data so far in 2Q paint mixed picture
  • Following disappointing jobs, ISM services data for May, fed funds futures have repriced timing of next rate hike; first rate hike now fully priced in 1Q 2017
  • See also: RESEARCH ROUNDUP: Jobs Report Seen Deterring Fed This Month
• Positioning becomes an issue when “inflationary pressure suggests the Fed is behind the curve,” which would “force investors to reduce exposure on the long end to shorten duration”: Mitchell
• Improvement in euro-area economic data could cause markets to price a less-aggressive ECB, or even end of easing cycle
• Other risks in June alone include:
  • German Constitutional Court ruling on ECB bond buying June 21
  • Yellen’s Humphrey-Hawkins testimony June 21
  • Brexit vote June 23
  • Spanish elections June 26
  • These events could stir volatility, in addition to quarter-end when “banks are collapsing their balance sheets”: Keeble

WHAT KEEPS RATES LOW

• U.S. accounts for ~60% of all positive-yielding debt, 89% of positive-yielding debt that has a tenor of
• Related story: UST Yields to Stay Low Amid Negative Rates Elsewhere, Citi Says

Auctions reflect long-term buyer demand for Treasuries, both domestic and foreign, with dealers awarded record lows in May’s 2-year (17.7%) and 5-year auctions (21.8%)

• 5Y 66.6% indirect award was 3rd-highest on record; 2Y direct award 32.5%, highest since Oct. 2012

Related story: Negative-Yielding Sovereign Debt Grew to $10.4t in May: Fitch