JPMorgan Sees a $1.2 Trillion Reason to Nix a U.S. Yield Rebound

(Bloomberg) -- Banks likely hold the equivalent of $1.2 trillion worth of short positions in 10-year Treasuries, suggesting any rebound in yields could be capped if they cover their bets, according to JPMorgan Chase & Co.

Expectations in 2018 for interest-rate rises from the Federal Reserve led banks to position themselves short duration, wrote strategists including Matthew Jozoff in a note Feb. 28. The recent “vicious” rate rally has exacerbated this already painful positioning and the financial institutions will find themselves under pressure to buy duration, they said.

“Bank buying of duration could manifest itself as buying sell-offs, essentially creating a structural bid to rates that inhibits yields from rising significantly,” the strategists wrote. “Rates may have trouble selling off as much as they might have historically if and when the market recovers from the stress.”

The widening of the coronavirus epidemic has sent investors rushing to haven assets, pushing benchmark Treasury yields to record lows. Rate-cut expectations spurred by the Federal Reserve's announcement Friday that it was ready to act rippled through bond markets on Monday, with 10-year yields falling to as low as 1.04%.

‘Fear Factor' Running High With Global Rate-Cut Bets Mounting

While banks won't necessarily buy duration at any price, the rally has worsened an already significant issue, given a shortage of appropriate securities to purchase, the JPMorgan team wrote. At current rate levels, banks could be short as much as $1.2 trillion in 10-year Treasury equivalents, they said.

“Anecdotally, having shared these statistics with several bank portfolio managers this past week, there was little surprise,” the strategists wrote. “If anything, some said that they thought we might even be on the light side on our estimates.”

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Ravil Shirodkar, Joanna Ossinger

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