Investors pare U.S. Treasuries holdings in week-survey

Tue Dec 4, 2012 10:22am EST

* Investors turn "net short" for 1st time since June

* Active clients' bond holdings unchanged again

NEW YORK Dec 4 (Reuters) - Investors reduced their U.S. Treasuries holdings after making room for $99 billion in supply last week, while most of them said they were cautious with their government debt position given the budget standoff in Washington, a survey released on Tuesday showed.

The share of investors who said on Monday they were "long" Treasuries, or holding more government debt than their portfolio benchmarks, fell to 13 percent from 17 percent in the prior week, J.P. Morgan Securities said in its weekly Treasury client survey.

On the other hand, the share of investors who were "short" on Monday, or holding less Treasuries than their benchmarks, rose to 17 percent from 13 percent the previous week.

It was first time since late June that investors were "net short" or there were more "shorts" than "longs," according to J.P. Morgan.

Last week, the U.S. Treasury Department sold $35 billion in two-year notes ; $35 billion in five-year debt and $29 billion in seven-year notes to solid demand. With competition from an expected wave of corporate bond supply this week, some investors might be lightening on their Treasuries holdings, analysts said.

"We are trying to reduce some of last week's inventory," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.

The share of investors surveyed who said they were "neutral" on U.S. government debt, or holding Treasuries equal to their portfolio benchmarks, was unchanged at 70 percent.

Investors turned cautious after the U.S. presidential election a month ago on worries about a protracted and contentious negotiation on a budget deal between President Barack Obama and top Republican lawmakers.

If they fail to reach a pact before year-end, a fiscal contraction, through a combination of automatic tax hikes and spending cuts worth $600 billion dubbed the "fiscal cliff," will phase in next year. Economists have warned this would likely cause a U.S. recession.

While fiscal cliff anxiety has fed safe-haven demand for Treasuries, the low yields on U.S. government debt have led investors to seek riskier investments for higher income, analysts said.

On Tuesday, the yield on benchmark 10-year Treasury notes was 1.618 percent, down 0.4 basis point from late on Monday and down 2.1 basis points from a week earlier.

While there were moderate changes in overall Treasuries positions in the latest week, active clients, including market makers and hedge funds, who are viewed as taking on speculative bets in Treasuries, clung to their positions for another week.

The share of longs among active traders was unchanged at 8 percent, while the share of neutrals was steady at 69 percent and the share of shorts was unchanged at 23 percent.