Aftermath of Japan's 'Golden Week' Could Squeeze Treasury Shorts

(Bloomberg) -- Japan has kicked off Golden Week, a stretch of holidays that typically leads to quieter markets in Asia. But the festive season could portend bad news for investors who are betting against Treasuries: The week after the holidays usually sees an uptick in purchases that could squeeze short sellers, Morgan Stanley strategists found.

Japanese firms, led by life insurers and commercial banks, make up for the inactivity during Golden Week with net purchases of non-yen bonds during the following week, according to the Morgan Stanley study, which tracked data in May from 2009 to 2017.

The increased demand for the long end of the curve could pose a challenge for short sellers. Speculators amassed a record short position against 10-year Treasuries in the week ending April 24, according to the Commodity Futures Trading Commission.

“Given the investment plans announced by lifers in Japan, especially related to
purchasing non-yen bonds without a currency hedge, and their propensity to buy after Golden Week, we think this investor base could buy 30y Treasuries in May and contribute to further curve flattening,” the strategists led by Matthew Hornbach wrote in a Friday note.

To contact the reporter on this story: Ivan Levingston in New York at ilevingston@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Greg Chang, Mark Tannenbaum

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