LIVE MARKETS-Weak demand could push Treasury yields higher, BofA
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WEAK DEMAND COULD PUSH TREASURY YIELDS HIGHER, BOFA
US Treasury yields could keep climbing as higher borrowing costs have yet to lure a broad enough wave of buyers into the market, Bank of America analysts said, citing bearish investor positioning, renewed selling by banks and outflows from long-duration bond funds.
Commodity trading advisers and asset managers remain positioned for yields to rise further, said rates analysts Meghan Swiber and Eleanor Xiao. Asset managers have added short positions in intermediate- and long-dated Treasury futures, while trend-following funds continue to bet against US government bonds and in favor of the dollar following the recent selloff.
That positioning points to a market still geared for a bear flattening, in which short-term yields climb faster than long-term borrowing costs.
"Higher yields have yet to attract a meaningful buyer base," the analysts wrote, sticking with their preference for short positions in 2-year rates and an underweight stance on duration.
US banks, meanwhile, led by large domestic lenders, cut Treasury and agency holdings by about $18 billion in the week ended September 16, a sharp reversal from July, when they were buying at 5-year yields roughly 50 basis points lower.
Funds focused on longer-dated government bonds also posted outflows, and mortgage-backed securities funds fared even worse, deepening concerns that investors are still reluctant to lock in current yields.
There are, however, early hints that foreign buyers may be warming to the market. Japanese private investors purchased about $7 billion of Treasuries through September 11, according to Japanese Ministry of Finance data, while custodial figures showed roughly $12 billion of buying by foreign official accounts over the past week. Those flows, however, are modest relative to the broader wave of selling.
There are also some positive signs with active bond funds trimming their duration underweights for a second consecutive week. These funds are now edging closer to neutral.
(Karen Brettell)
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