U.S. Treasury bulls collectively surrender: CTAs, asset managers, and Japanese funds withdraw simultaneously, an even bigger storm is brewing!

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The U.S. Treasury market is experiencing a rare rout among bullish positions.

On May 19, according to Chasewind Trading Desk, BofA's latest research report stated that bullish positions on the U.S. Treasury yield curve have completely capitulated, leaving only a small amount of out-of-the-money (OTM) residual positions, while bearish positions now dominate and most are in-the-money (ITM).

The bank’s U.S. rates research team pointed out in its "U.S. Rates Watch" report that from systematic trend followers (CTAs) to global active asset managers, as well as Japanese private and official investors, various funds are simultaneously adjusting positions—either withdrawing from or shorting U.S. Treasuries.

CTAs’ short positions have stretched to the limit, asset management institutions continue to increase shorts or close longs, Japanese private investors have been net sellers of U.S. Treasuries for two consecutive months, and potential yen interventions may bring $40–50 billion in hidden selling pressure.

However, behind this massive repositioning, rising yields are prompting a frenzy of capital flowing back into the short-end and credit bond markets.

Meanwhile, analysis points out, the “Sword of Damocles” hanging over the market is the Bank of Japan's potential large-scale FX intervention. If the intervention expands and triggers official U.S. Treasury selling, the global fixed income market may experience a real storm.

CTAs and Asset Managers Fully Shift; Short Positions Near Extremes

The reversal in market positions is very dramatic. Data from BofA’s systematic strategy team shows that CTAs’ short positions along the entire yield curve have reached extremes, and the short focus has recently shifted from the short-end to the long-end.

Future position changes will depend heavily on volatility: if futures continue to fall as volatility drops, shorts may continue to expand; but if volatility rises, shorts are expected to retreat.

Meanwhile, global asset managers are rapidly shortening duration. Last week, asset managers mainly added shorts or closed longs; net shorts increased on all maturities except for 20-year (US) and 30-year (WN) Treasuries.

Active benchmark aggregate funds (Agg funds) currently maintain an “underweight” in U.S. Treasuries, but an “overweight” in Mortgage-Backed Securities (MBS) and Investment Grade bonds (IG).

The biggest change over the last month is the continuously rising overweight proportion in IG bonds; this spread overweight strategy has supported active funds in outperforming U.S. Treasuries since early April.

Japanese Funds Keep Retreating, Forex Intervention Shadow Looms Over Treasuries

Foreign investor dynamics add another major layer of risk to the U.S. Treasury market, especially movements of Japanese funds.

Japan’s Ministry of Finance (MoF) data shows that, after selling $18 billion in February, Japanese private investors continued net selling $14 billion in U.S. Treasuries in March, with banks as the main selling force, and pensions and life insurers actively participating.

The main reason is that, for Japanese investors, after three months of rolling FX hedges, the yield on 10-year U.S. Treasuries is still deeply negative compared to Japanese government bonds (e.g., 20-year JGB with a spread of -2.09%).

What’s even more worrying for the market is the potential official FX intervention from Japan. BofA FX strategists estimate that the recent suspected yen-supporting intervention funds are about $72 billion (possibly the largest since 2022), which means implied U.S. Treasury sales could reach $40–50 billion.

Although as of the week ending May 13, the Fed’s foreign reverse repos (RRP, official cash proxy indicator) and custody holdings data have not shown clear evidence of large-scale official liquidation (custody holdings only moderately declined by $10 billion compared with pre-intervention), the source of intervention funds remains a mystery.

BofA warns that if yen interventions require near $100 billion in U.S. Treasury sales, it will have a substantive impact on Treasuries, the scale would be equivalent to the decline in custody holdings when the Iran conflict broke out, and would pose a major headwind for frontend spread positions.

Yield Spike Sparks Capital Migration; Short Duration Becomes Absolute Safe Haven

Although overall positioning is bearish, fund flows reveal a different dimension of market tension: higher yields are drawing capital back in.

As duration is sold off, fund inflows accelerate. Last week, U.S. fixed income funds attracted as much as $18 billion, double the 12-week average.

However, funds are not flowing in blindly. Inflows are mainly led by aggregate, short-term government bonds, and IG bonds, while long-term government bond funds are the only category facing outflows.

This significant differentiation shows that, as the market reprices Fed rate hike risks, investors are quickly shortening their weighted average maturity (WAM).

Notably, amid long withdrawal and foreign selling, Primary Dealers and U.S. domestic banks are absorbing supply.

Data show dealer balance sheets are expanding, with holding increases at the long end in both spot and futures markets. Meanwhile, U.S. domestic banks have increased holdings of U.S. Treasuries and agency bonds (UST & Agency) at a noticeably faster pace than MBS in recent months.

Additionally, the traditional fixed income market heavyweight buyer—DB private pensions—currently enjoys a strong funding position (Milliman index shows ample funds). Historical experience shows that as funding improves and rates rise, pensions are inclined to buy more Treasuries.

However, April data show that stripping activity in Treasuries has fallen from the peak at the end of 2024, below the historical average, signaling that momentum from long-term buyers is marginally slowing and cannot fully offset the current selling frenzy.

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The above brilliant content is from Chasewind Trading Desk.

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Risk Warning & DisclaimerThe market is risky; investment needs caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views or conclusions in this article fit their specific circumstances. Investing based on this is at your own risk. ```