n41bingo| Bank of New York Mellon: Investors flock to long-term U.S. debt facing potential risks

Bank of New York Mellon saidn41bingoIf views on interest rates again become more pessimistic and force large sales of positions, investors 'flood into longer-term U.S. Treasuries is a potential problem.

John Velis, foreign exchange and macro strategist at Bank of New York Mellon, wrote in a note to clients, citing the company's iFlow data, that as market participants start chasing higher yields after June 2023, they are also seizing the duration. There has been "stable and continuous buying" in long-term bonds with a maturity of 10 years and above, and new demand has also emerged for the 3-5-year and 5-7-year bonds.

Bond prices have risen steadily this month on new signs that the economy and labor markets are cooling-which is seen as allowing the Fed to begin easing monetary policy later this year. But before that, the data largely highlighted the strength of the U.S. economy, prompting traders to cut bets that the Fed will cut interest rates multiple times this year. This caused investors to suffer new losses and eroded confidence in the direction of the market.

"We further believe that the pursuit of duration is a potential problem-if yields start to surge, these positions could suffer losses and lead to significant sell-offs in positions that we see as relatively saturated," Velis wrote.

The bank's data showed cross-border demand for U.S. Treasuries has been flat, with few new net overseas purchases. Domestic holders are saturated with positions while overseas demand is "sluggish", raising concerns about the market's ability to continue to absorb large amounts of bond issuance in the coming quarters.

Elsewhere, the dynamics of cash and short-term bond purchases suggest that demand for these assets is weakening. iFlow data shows that cash holdings have fallen since the debt ceiling was resolved in June 2023, and this continues this year.

"If these funds are invested in longer-term instruments, it will make us even more concerned about the flood of real money positions into the U.S. bond market," Velis said.

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