Wall Street Banks Join Hedge Funds in Boosting Treasury Holdings

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Wall Street’s biggest bond dealers are joining hedge funds in loading up on Treasuries as the outlook for inflation tumbles.

JPMorgan Chase & Co., Citigroup Inc. and the 20 other companies that trade with the Federal Reserve increased their holdings to a net $42 billion in data reported last week, the highest level in four months. Large speculators including hedge funds boosted their positions in Treasury 10-year futures to a net 65,642 contracts, the most in two years.

Treasuries rallied in July as tumbling oil prices underscored expectations inflation will stay in check. While the Fed is preparing to raise interest rates, consumer prices that are scarcely growing are backing the case for policy makers to increase borrowing costs slowly.

“There’s relief because of oil prices,” said Hiroki Shimazu, senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest bank. For the Fed, “the pace will be much slower than previous rate hikes,” he said.

Treasuries slipped Monday in Asian trading, trimming gains after advancing for three straight weeks.

Benchmark U.S. 10-year note yields rose one basis point to 2.19 percent as of 7:28 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.125 percent security due in May 2025 fell 1/8, or $1.25 per $1,000 face amount, to 99 3/8.

Yellen Expects

Treasuries returned 1.2 percent in July, the best month since January, based on Bloomberg World Bond Indexes. They have gained 0.9 percent in 2015.

Primary dealers added $19.3 billion to their Treasuries holdings in the period to July 22, the biggest increase since the second week of March, data reported on July 30 show.

Fed Chair Janet Yellen said in July she expects the central bank to raise its benchmark rate this year, while emphasizing the pace of increases will probably be gradual.

Crude oil has tumbled more than 50 percent in the past year, while consumer prices increased 0.1 percent in June from 12 months earlier.

The difference between yields on two-year Treasuries and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, fell as low as 0.73 percent Monday, the least since February. The average for the past decade is 1.37.

Not everyone’s buying Treasuries. Foreign central banks sold for four straight weeks, the longest run since February, according to Fed data.

Labor Market

The U.S. labor market continues to improve, and policy makers expect inflation to accelerate gradually toward their 2 percent target, the central bank said in a statement at its July 28-29 meeting.

U.S. employers added more than 200,000 workers for a third straight month in July, based on a Bloomberg survey of economists before the report on Aug. 7.

Fed rate increases will drive Treasury prices down, said Will Tseng, a fund manager in Taipei for Mirae Asset Global Investments Co., which has $75.8 billion in assets.

“Eventually, the Fed will hike, so there’s no reason for Treasuries to rally,” he said.

(An earlier version of this story was corrected to show the appropriate period for holdings data.)