Treasury Selloff Takes Breather Amid Asia Demand, Short Covering

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Mar 24 2021, 12:45 PMMar 24 2021, 2:50 PMMarch 24 2021, 12:45 PMMarch 24 2021, 2:50 PM

(Bloomberg) -- The selloff in Treasuries has taken a breather this week, thanks to a combination of suspected buying from Asia, short covering and fresh option bets on calmer times ahead.

So far this week U.S. benchmark yields have dropped almost 10 basis points during the Tokyo trading session, suggesting a possible return of Japanese investors after more than $34 billion in foreign bond outflows from the country in the last two weeks of February. Japan’s new fiscal year starts in April so bond bulls will be on the lookout for new purchases.

Meanwhile, positions in 10-year Treasury futures dropped the most in almost a month after Tuesday’s rally. A slump in open interest by almost 79,000 contracts -- the equivalent of around $7.5 billion in 10-year notes -- points to investors closing out positions following a surge in new shorts late last week.

The relative calm in Treasuries comes after optimism over the economic recovery sent benchmark yields surging to their highest level in more than a year and a gauge of longer-maturity bonds into a bear market. Volatility had also been climbing amid a repricing of rates due to massive fiscal stimulus and vaccine rollouts.

But the fact that 10-year and 30-year yields have retreated from key levels -- respectively 1.75% and 2.50%, the highest closing levels this year -- has encouraged some volatility sellers into the market.

A large trade on Tuesday saw a sale of so-called straddles in 10-year notes -- a combination of a put and a call with the same strike and expiry -- that expire on May 21. The investor raked in more than $24 million in premiums, with the bet paying off if yields stay within a 24 basis point range either side of Wednesday’s level of 1.60%.

One final source of short-term demand for Treasuries could come from quarter-end flows. Strategists at Bank of America estimated rebalancing out of equities into bonds may result in $41 billion of Treasuries purchases, according to a recent note.