Hedge Funds, China Drive Record Treasury Bond Buying in March

(Bloomberg) -- As U.S. Treasuries sold off in March, global investors had one thing on their mind: buy.

Foreign funds bought $118.9 billion of Treasuries in the month, the most on record based on data going back to 2016, according to the Treasury Department’s release on Tuesday.

The purchases -- with strong demand seen from China and the Cayman Islands -- took place as benchmark 10-year yields surged to the highest since the pandemic began, with some investors dumping the bonds on expectation of higher inflation. Since then, the yields have tracked lower as the Federal Reserve pushed back on tapering talk.

“This demand is nothing short of impressive, knowing that 10-year yields rose 30 basis points over the month of March,” JPMorgan Chase & Co. strategists led by Jay Barry wrote in a client note.

Hedge Funds Nailed Treasuries Rout With $100 Billion in Sales

The Cayman Islands, seen as a proxy for hedge funds and other leveraged accounts, bought $34.9 billion of U.S. sovereign bonds, after selling more than $100 billion in the first two months of the year. This likely reflects short covering as yields moved “aggressively higher” in March, according to Barry.

The strongest demand came from China, with purchases hitting $41.6 billion in March, the most since the record reached in January 2013, according to data going back to 1985.

China Bought Most Treasuries in Eight Years as Yields Climbed

“At the country level, our valuation-adjusted estimates suggest that China was the largest net buyer of long-term Treasuries overall in March,” Goldman Sachs Group Inc. strategists including Vickie Chang wrote in a client note. On a valuation-adjusted basis, this marked a fourth consecutive month of Chinese buying in long-term Treasuries, Chang said.

While monthly net purchase data shows significant changes in Treasury holdings, a list of major foreign holders reflect only modest adjustments, with the discrepancy primarily due to the latter data set also including holdings of Treasury Bills and certificates.

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