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Investors pare longer-dated U.S. Treasuries in week -survey
April 15, 2014 / 3:41 PM / in 4 years

Investors pare longer-dated U.S. Treasuries in week -survey

* Share of “short” investors is most since June

* No active clients bullish on long-dated issues in week

NEW YORK, April 15 (Reuters) - More investors pared their holdings of longer-dated Treasuries in the latest week after the minutes of the Federal Reserve’s March policy meeting suggested the U.S. central bank would be unlikely to raise interest rates until the second half of 2015, according to a survey released on Tuesday by J.P. Morgan Securities.

The latest Fed minutes, released last Wednesday, suggested most policymakers wanted to stick with the near-zero rate policy adopted in December 2008 until the U.S. economy creates more jobs and an inflation rate achieves its 2 percent target.

The share of investors who said their holdings of longer-dated U.S. government debt were greater than their holdings of portfolio benchmarks fell to 11 percent from 25 percent a week earlier, J.P. Morgan Securities said.

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 latest Fed minutes stoked immediate demand for short- and medium-dated Treasuries and reduced holdings of longer-dated issues as traders entered into curve “steepener” trades or exited from curve “flatteners.”

Longer-dated Treasuries rebounded last Thursday and Friday as steep losses in global stock markets revived safe-haven bids.

Before the release of the March Fed minutes, some traders were worried by the individual interest rate forecasts of Fed policy-makers released at the close of the March Fed meeting, which they interpreted to mean the Fed might consider raising rates sooner than they had thought.

In addition, Fed Chair Janet Yellen, at a press conference after the March policy meeting, said the Fed might increase rates a “considerable time” after it completed its bond-purchase program, a period she defined as “around six months.”

Some investors had entered into curve flatteners or exited from curve steepeners after the forecasts and Yellen’s remarks, moves that were favorable to longer-dated Treasuries.

Since the reversal of those moves following the Fed minutes, 32 percent of investors surveyed by J.P. Morgan said they were “short” in duration of Treasuries, or owning fewer longer-dated Treasuries than the benchmarks against which their portfolios are gauged, up from 20 percent last week.

The share of “shorts” exceeded “longs” by 21 percentage points, the most since June 3, J.P. Morgan said.

Fifty-seven percent of investors surveyed said their longer-dated Treasuries holdings matched their benchmarks, compared with 55 percent a week earlier.

On Tuesday, benchmark 10-year Treasury yields slipped 2 basis point to 2.62 percent on renewed selling in stocks and fears about a possible civil war in Ukraine.

Among active clients, viewed as making speculative bets in Treasuries, none said they held more longer-dated Treasuries than their benchmarks, compared with 24 percent a week ago.

Fifty-four percent of active investors said their longer-dated Treasuries holdings matched their benchmarks, up from 38 percent the prior week.

Forty-six percent of the active clients said they were short in duration versus their benchmarks, up from 38 percent last week. This was the widest gap between active shorts and longs since May 28, J.P. Morgan said.

J.P. Morgan surveys 40 to 60 of its Treasuries clients weekly, of which 60 percent are fund managers, 25 percent are speculative accounts, and 15 percent are central banks and sovereign wealth funds.

It asks 10 to 20 of its active clients each week about their Treasuries holdings, of which 70 percent are speculative accounts and the rest are money managers. (Reporting by Richard Leong; Editing by Leslie Adler)

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