JPMorgan: Europe is unlikely to dump US Treasuries on a large scale; the key variable in the next phase lies in technical factors.

The global bond market is experiencing intense volatility. On one hand, sudden changes in Japanese politics have caused Japanese bond yields to soar, steepening global yield curves; on the other hand, President Trump’s threat of tariffs on Greenland has sparked market fears of “de-dollarization” and retaliatory selling of U.S. Treasuries by Europe.

According to Wind-Chasing Trading Desk, on January 20th, JPMorgan released a report voicing a view sharply at odds with market panic. The bank believes that despite escalating geopolitical tensions, the likelihood of European countries selling U.S. Treasuries on a large scale as retaliation, as Asian central banks have done, is extremely slim.

The key logic behind this is the structural differences among U.S. Treasury holders and the current healthier investor positioning. For investors, this means there’s no need to panic about a “doomsday sell-off” scenario, but tactical caution is warranted. JPMorgan recommends that investors take profits from flattening trades on the 10-year/30-year U.S. Treasury yield curve now and be alert for technical breaches at key levels on the 5-year U.S. Treasury yield.

European U.S. Treasuries Are Mostly ‘Private Assets’ — Governments Can Hardly Order Sales

The biggest market worry now comes from President Trump’s weekend threat: imposing a 10% tariff on any country opposing the U.S. takeover of Greenland, with a gradual increase to 25% by June 1. This extreme protectionist rhetoric evokes memories of previous "Liberation Day" statements, prompting wild speculation that European countries may retaliate by selling off huge holdings of U.S. Treasuries.

After all, data show that European countries hold a total of $3.8 trillion of U.S. Treasuries, which is comparable to the holdings of Asian countries. JPMorgan’s models indicate that for every 1 percentage point drop (about $300 billion) in foreign-held U.S. Treasuries as a proportion of U.S. GDP, the 5-year U.S. Treasury yield typically rises by more than 33 basis points.

However, JPMorgan points out a fatal flaw in this panic-driven logic in its analysis. The bank believes that there are fundamental differences in how Asia and Europe hold U.S. Treasuries. China and Japan together possess over $4.5 trillion in reserve assets, with their U.S. Treasury positions mainly reflecting official (government) intentions. In contrast, the scale of official reserves in Europe is much smaller.

JPMorgan judges that U.S. Treasuries held by Europe are mainly in private hands. Although Belgium, Luxembourg, etc. show large U.S. Treasury holdings in data, these small countries serve as global financial hubs, and much of their positions are custodial accounts for external entities. Thus, European governments fundamentally lack the ability to force private sector asset reallocation and mass sales of U.S. Treasuries via administrative orders as Asian governments might. Based on this, JPMorgan believes the risk of “de-dollarization” triggering a surge in yields is overestimated by the market.

Extremely ‘Light’ Positioning—Technical Backdrop Better Than Last April

Beyond positioning structure, JPMorgan sees the current technical backdrop as providing an extra cushion for the U.S. Treasury market. Before the previous “Liberation Day” shock, widespread recession fears led investors to be excessively long duration, resulting in extremely crowded positions. When sentiment shifted from recession worry to stagflation, these crowded longs triggered a stampede for the exits, causing long-end yields to soar.

In the current environment, things are completely different. JPMorgan’s Treasury client survey index shows investor duration positions near their lowest levels in two years, more than two standard deviations below their one-year average.

The bank’s core bond fund model echoes this, showing duration beta approaching -2 based on its one-year Z-score. That means there are currently no massive long positions in the market that need to be unwound. JPMorgan notes that active core bond funds currently maintain a significant curve steepening exposure relative to benchmarks, further limiting the risk of investors reducing long-end exposure. In short, the market is already “defensive,” weakening momentum for yields to rise sharply further.

Tactical Moves: Take Profits on Flattening Trades and Stay Alert Ahead of the 20-Year Treasury Auction

Though fundamentals do not support panic selling, JPMorgan adopts a more cautious tactical approach in trading strategy.

The bank has announced the closure of its 10-year/30-year U.S. Treasury yield curve flattening trade, booking modest profits. JPMorgan began this trade at the start of January, citing excessive steepness in the long-end curve. While there has been some mean reversion, the curve still stands about 6 basis points above the bank's fair value model.

JPMorgan believes, given volatility in the Japanese government bond market may remain high before the February 8 elections, and with political risks around Greenland slow to dissipate, the risk/reward of maintaining a short position is no longer attractive, hence the advice to shift to neutral.

Additionally, JPMorgan is cautious toward the upcoming $13 billion reopening auction for 20-year Treasury bonds. Although yields have risen with the market, the 20-year U.S. Treasury remains expensive from a relative value perspective (more than one standard deviation above fair value after controlling for rate level and curve shape).

Given that investor demand dropped sharply at the December auction and valuations currently lack appeal, JPMorgan expects the market will require some discount to absorb this supply smoothly.

Finally, JPMorgan has issued a stern warning on technical patterns. Their technical analysis shows the 5-year U.S. Treasury yield has broken below the key support area (3.785%-3.80%), happening sooner than the bank anticipated. JPMorgan emphasizes that this breach signifies bears are now fully in control. With this key defense broken, the next meaningful support for the 5-year U.S. Treasury yield points directly to 3.93%, the 38.2% retracement of January 2025 market action. As long as market prices don’t reclaim the 3.785%-3.80% area, bearish momentum remains intact.

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