Treasury Rout Subsides as Cash Buyers Step In to Buy the Dip

  • In Business
  • 2021-09-28 20:29:13Z
  • By Bloomberg

(Bloomberg) -- The extended selloff in Treasuries that drove five-year yields to fresh 19-month highs on Tuesday was just too much for some investors, who jumped in and stanched the bleeding.

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A steady flow of buyers ranged from foreign and domestic funds as well as leveraged accounts. Central bank buying was also prominent in the front-end and belly of the Treasury curve, according to traders familiar with the flow. A solid U.S. 7-year note auction helped to calm price action over the afternoon session as yields settled a few basis points below the earlier highs.

It was also an active session across Treasury futures, where volumes were around 70% above recent levels over the New York session. There was a notable uptick in volumes when 10-year yields peaked through 1.565% and then quickly reversed down to back under 1.55%, suggesting buyers at work.

A big question now is whether the yield back-up to the highest levels since 2020 will also be enough to tempt investors in Asia, typically renowned for buying into dips. This may not be the case this time around, according to Morgan Stanley strategists who note that recent gains in Japanese shares have "reduced the incentive for banks in Japan to earn income and, possibly, capital gains."

Treasuries Face Risk of Prolonged Selloff From Convexity Hedging

Meanwhile, open interest may provide clues as to whether buying over the New York session was motivated by short covering, or fresh long positions.

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©2021 Bloomberg L.P.


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