Morgan Stanley identifies the source of massive Treasury selling
Repost from 3-25-2021
“Of course, the initial burst of Treasury futures selling – which appears to have originated out of Japan every time – would then have a domino effect on the rest of the world, and as Morgan Stanley notes, “weak price action during the Tokyo session led to additional selling during the London session” although to a lesser extent. As the next chart shows, since the start of the year, 85% of the cumulative decline in TY futures prices occurred in the overnight session, i.e., Japan is almost single-handedly responsible for the dump surge in yields this year!”
USAGOLD note: Morgan Stanley believes that the selling came from Japanese commercial banks who will now see the yield as attractive and buy back in before Japan’s fiscal year-end (March 31). To what extent that balances the prevailing negative psychology in the bond market remains to be seen. However, the Morgan Stanley revelations will serve as a reminder of the enormous power Japan and China can exert in the U.S. Treasuries market as a result of their massive holdings – about $2.37 trillion in the aggregate. It would not be in either country’s best interest to dump their sovereign holdings on the market but that does not preclude other entities within their borders from doing the same for their own reasons. If Morgan Stanley is right about this, we see the influence even a single commercial bank or pension fund can wield in the bond market – and just how precarious the situation has become.