Net shorts in U.S. long-dated bonds rise to 8-year high -JPM survey

NEW YORK, June 3 Tue Jun 3, 2014 10:25am EDT

NEW YORK, June 3 (Reuters) - The difference between the number of investors who said they are bearish on U.S. long-dated Treasuries exceeded those who are bullish grew to its highest in eight years, according to a J.P. Morgan survey.

A widening gap between those who are "short" long-dated U.S. government debt and those who are "long" belied the bond market rally in May when benchmark yields fell to 2.40 percent last week, which was an 11-month low.

Persistent demand for longer-dated bonds stemmed from worries that U.S. growth and inflation are falling short of the Fed's forecasts.

Foreign demand also exacerbated the drop in U.S. yields as investors anticipate the European Central Bank might lower interest rates on Thursday to avert deflation in the euro zone, according to analysts.

The share of "short" investors exceeded the share of "long" investors by 29 percentage points, which was the highest since May 1, 2006, according to J.P. Morgan Securities.

The share of "short" investors rose to 40 percent in the latest week ending June 2, up from 35 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 fell to 11 percent from 17 percent.

Long-dated Treasuries were the top performing U.S. bonds in May as government bonds that mature in 20 years or longer earned a 3.02 percent total return, according to an index compiled by Barclays.

The share of neutral investors, or those who said they are holding long-dated securities equal to their portfolio benchmarks, edged up to 49 percent from last week's 48 percent which was the lowest proportion since Oct. 25, 2010.

Benchmark 10-year Treasuries yields rose more than 3 basis points to 2.568 percent early Tuesday. (Reporting by Richard Leong Editing by W Simon)