Weak demand could push Treasury yields higher, BofA
TLT•Bank of America analysts said Treasury yields could keep rising because higher borrowing costs have not attracted enough buyers. The 10-year yield rose to about 5.23%, while U.S. banks cut Treasury and agency holdings by about $18 billion in the week ended September 16.
1. Buyer demand remains weak
Bank of America rates analysts Meghan Swiber and Eleanor Xiao said Treasury yields could continue climbing, citing bearish investor positioning, renewed bank selling and outflows from long-duration bond funds. They said asset managers added short positions in intermediate- and long-dated Treasury futures, while trend-following funds continued to bet against government bonds.
2. Banks and funds sell bonds
U.S. banks cut Treasury and agency holdings by about $18 billion in the week ended September 16, reversing July buying when five-year yields were roughly 50 basis points lower. Funds focused on longer-dated government bonds saw outflows, as did mortgage-backed securities funds. Japanese private investors bought about $7 billion of Treasuries through September 11, and foreign official accounts bought roughly $12 billion over the past week, though those flows were modest relative to broader selling.
3. Some signs of support
Active bond funds trimmed their duration underweights for a second consecutive week and moved closer to neutral. The analysts maintained a preference for short positions in two-year rates and an underweight stance on duration.
