Fewest investors neutral on U.S. long-dated debt since 2010 -survey

NEW YORK Wed May 28, 2014 9:54am EDT

NEW YORK May 28 (Reuters) - A private survey released on Wednesday showed the number of investors who said they are neutral on U.S. long-dated Treasuries was at the lowest since late 2010, signaling the market's divergent views on when the Federal Reserve might raise interest rates.

Benchmark Treasuries yields have fallen to their lowest levels since last July on persistent demand for longer-dated bonds stemming from worries that U.S. growth and inflation are falling short of the Fed's forecasts. This would likely cause policy-makers to refrain from raising interest rates until the second half of 2015 at the earliest, analysts said.

On the other hand, evidence of job growth and manufacturing activity rebounding from a harsh winter stoked some investors to think the Fed might be ready to tighten policy sooner rather than later, they said.

The share of neutral investors, or those who said they are holding long-dated securities equal to their portfolio benchmarks, fell 18 percentage points from the prior week to 48 percent. This is the lowest proportion of neutral investors since Oct. 25, 2010, according to J.P. Morgan Securities that conducted the survey.

More of the investors who were neutral last week turned short on longer-dated Treasuries, meaning they said they held fewer of these issues than their benchmarks.

The share of "short" investors rose to 35 percent in the latest week, up from 24 percent in the prior week.

By holding fewer longer-dated Treasuries, investors reduce the duration or interest rate risk of their portfolios in anticipation of a market drop, which generally causes longer-dated bonds to generate bigger losses than shorter-dated debt.

Conversely, longer-dated Treasuries produce higher returns than short-term debt in a market rally.

The share of "long" investors or those who said they held more longer-dated Treasuries than their benchmarks rose to 17 percent from 10 percent the previous week.

The share of "short" investors exceeded the share of "long" investors by 18 percentage points, up from 14 points last week.

Benchmark 10-year Treasuries yields fell more than 4 basis points to 2.472 percent early Wednesday. (Reporting by Richard Leong; Editing by Chizu Nomiyama)