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Investing.com -- Foreign investors and dealers emerged as the largest buyers of U.S. Treasuries in the first quarter, while other major buyer bases showed limited demand, according to Bank of America’s flow of funds data. The bank views dealer demand primarily as a backstop for other private sources and expresses concern about the outlook for foreign demand.
Custodial holdings, which serve as a proxy for foreign official demand, declined sharply last week, with U.S. dollar asset holdings now down over $60 billion since the beginning of April. Foreign participation at Treasury auctions continues to moderate, as evidenced in the latest allotment data, while domestic benchmark investors reduced steepener risk and added to duration.
Bank of America’s futures positioning proxy suggests a modest bias for rates to sell off versus rally across most points on the curve except for TU. Friday’s selloff likely turned more elevated long positions in FV and TY further out of the money, according to the bank’s analysis.
CTA momentum leveled off last week after consistently turning less long since early April. The bank’s systematic flows monitor shows that CTAs (Commodity Trading Advisors) are modestly short across the curve, with betas suggesting they are shorter at the front end of the curve versus the long end.
The household sector’s demand for U.S. Treasuries appears to be significantly cooling compared to 2023 and the first half of 2024, which is largely consistent with a moderation in basis positions from hedge funds that appeared to peak in mid-2024. Bank of America finds the foreign demand trajectory concerning, especially as more global investors look to reduce U.S. assets or increase hedge ratios.
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