Wall Street Bond Stake Balloons in Time to Profit From Fed Rally

Updated on
  • Primary dealer holdings of bonds rise to highest in 21 months
  • Global central bank debt sales bloated holdings, Nomura says

Wall Street banks that trade directly with the Federal Reserve loaded up on bonds before the central bank meeting this week that sent the market surging. Countries that are trimming their Treasury holdings provided the supply.

Goldman Sachs Group Inc., Morgan Stanley and the 20 other primary dealers boosted their positions in U.S. debt to $91.8 billion, the most in 21 months. They bought ahead of the Fed’s decision Thursday not to raise interest rates, which sparked the biggest rally in two-year Treasuries since 2009.

Now the danger is that the banks unwind the position, said John Gorman, Tokyo-based head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc., which is also a dealer. At least some of the increase was caused by nations are selling Treasuries to raise money to support their currencies. When dealers take that debt into their portfolios, it bloats their holdings, he said.

“Right now they’re just warehousing it,” Gorman said. “They might have to start reducing their Treasuries balance sheet.”

The increase in holdings doesn’t automatically mean Wall Street banks are bullish because they may also hold hedges that benefit if bonds fall, said Ali Jalai, who trades bonds in Singapore at Bank of Nova Scotia, another primary dealer.

The data, reported by the Fed every week, include sovereign bonds, agency securities, corporate debt and municipal bonds. The latest report issued Thursday is for Sept. 9.

Primary Dealers

Primary dealers are trading counter parties to the New York Fed as it implements monetary policy, according to the central bank’s website. They are required to underwrite the U.S. debt, trade in the bond markets and provide the Fed with information and analysis.

Treasury two-year yields dropped 13 basis points Thursday, the biggest decline since March 2009, according to data compiled by Bloomberg. The notes were little changed Friday at 0.67 percent as of 6:50 a.m. in London.

The broad Treasuries market jumped 0.6 percent Thursday, the biggest gain since June 29, based on the Bloomberg bond indexes. They have returned 1 percent this year.

The central bank’s policy committee finished its meeting by leaving interest rates at a record low, maintaining an era of record monetary stimulus in a time of rising international risks and slow U.S. inflation.

A decline in foreign reserves in China and other countries, including Malaysia, is driving speculation they have been selling dollar assets to raise money they can use to stem weakness in their currencies. Foreign holdings of U.S. debt dropped by $98.6 billion in July to $6.1 trillion, the least since October, based on the most recent Treasury Department data.