Treasury Investors Most Bullish Since 2013 as Fed Decision Looms

  • JPMorgan weekly survey shows rising net holdings of Treasuries
  • Latest CFTC figures show futures bets against two-year notes

Last week’s rout in Treasuries may be attracting buyers to government debt, even as the Federal Reserve looks set to raise interest rates for the first time in a decade.

In a JPMorgan Chase & Co. survey of clients, the net percentage of investors holding Treasuries rose to 6 percentage points Monday from zero a week earlier, the most bullish stance since November 2013. The increase followed a sell-off last week after the European Central Bank disappointed investors with its stimulus measures. On Dec. 3, 10-year Treasury yields logged their biggest single-day jump since May.

"Looks like some opportunity presented itself because of some highs in yields, so some buying came in," said Michael Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $313 billion.

Benchmark U.S. 10-year yields fell 1 basis point, or 0.01 percentage point, to 2.22 percent as of 5 p.m. in New York. The yield reached 2.36 percent Dec. 4, the highest in almost a month.

Yields on two-year notes, which are more vulnerable to changes in Fed policy, soared to the highest since 2010 last week. Futures wagers of hedge-fund managers and other large speculators were at a 12-month high that two-year notes will fall, according to Commodity Futures Trading Commission data for the week ended Dec. 1.

Auction Demand

Last week’s leap in yield drew investors to Tuesday’s $24 billion auction of three-year notes. The 22 primary dealers that are required to bid at Treasury auctions only needed to buy 34 percent, the least in more than five years, according to data compiled by Bloomberg.

Direct bidders, a group of investors that includes mutual funds, purchased 18.6 percent at the sale, the most since September 2014.

"It shows you the market took it to heart that the hiking cycle will be gradual," said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer. "A lot of market participants thought that before the first liftoff, people would demand concession for front-end paper."

Short-maturity yields close to five-year highs are even more attractive for investors who see a Fed move on Dec. 16 as mostly reflected in debt prices. Futures traders see a 78 percent chance of a Fed boost next week, according to data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.375 percent after liftoff.

"There’s a debate about how much is already priced in," Lorizio said.

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