Global bond markets are experiencing intense volatility. On one hand, a sudden political shift in Japan has sent Japanese government bond yields soaring, steepening yield curves worldwide. On the other hand, President Trump's tariff threats concerning Greenland have sparked market fears of "de-dollarization" and retaliatory sales of US Treasuries by Europe.
On January 20th, JPMorgan Chase issued a report presenting a view starkly different from the prevailing market panic. The bank argues that despite escalating geopolitical tensions, the likelihood of European countries massively selling off US Treasuries as retaliation, similar to Asian central banks, is extremely low. The key logic behind this lies in the structural differences among US Treasury holders and the currently healthier investor positioning. For investors, this means there's no need to overreact to a "doomsday sell-off" scenario, but tactical caution is still advised. JPMorgan recommends investors take profits on their 10-year/30-year US Treasury yield curve flattening trades and be wary of the technical breakdown already observed in 5-year Treasury yields at a critical level. The US Treasuries held by Europe are largely "private property," making government-mandated sales difficult. The market's primary fear stems from President Trump's weekend threat: to impose a 10% tariff on any country opposing the US acquisition of Greenland, gradually increasing to 25% by June 1st. This extreme protectionist rhetoric echoes previous "Liberation Day" statements, leading market participants to frantically speculate whether European nations might retaliate by selling their massive holdings of US Treasuries. After all, data shows European countries collectively hold $3.8 trillion in US Treasury securities, a scale comparable to the holdings of Asian nations. JPMorgan's models indicate that for every 1 percentage point decline (approximately $300 billion) in foreign holdings of US Treasuries as a percentage of US GDP, 5-year Treasury yields tend to rise by more than 33 basis points.
However, JPMorgan's analysis points out a critical flaw in this panic-driven logic. The bank highlights a fundamental difference in the nature of Treasury holdings between Asia and Europe. China and Japan collectively hold over $4.5 trillion in reserve assets, with their Treasury holdings primarily reflecting official (government) policy. In contrast, Europe's official reserves are significantly smaller. JPMorgan assesses that Europe's Treasury holdings are predominantly in private hands. Although data shows countries like Belgium and Luxembourg hold substantial amounts, these small nations act as global financial centers, and a large portion of their holdings are custodial accounts for external entities. Consequently, European governments simply lack the ability to force private sector asset reallocation and Treasury sales via administrative orders, unlike some Asian nations. Based on this, JPMorgan believes the risk of yield spikes triggered by so-called "de-dollarization" is overestimated by the market.
Extremely "light" positioning suggests better technicals than last April. Beyond the holding structure, JPMorgan believes the current technical backdrop provides a cushion for the US Treasury market. Before the previous "Liberation Day" shock, widespread recession fears led investors to be excessively long duration, creating extremely crowded positioning. When the narrative shifted from recession to stagflation concerns, this crowded long positioning triggered a stampede of unwinding, causing long-end yields to surge dramatically.
The current environment is entirely different. JPMorgan's Treasury Client Survey index shows that investor duration positioning is near its lowest level in the past two years, more than two standard deviations below the one-year average. The bank's core bond fund model sends a similar signal, with duration beta Z-scores on a one-year basis nearing -2. This indicates the market currently lacks a large volume of long positions needing unwinding. JPMorgan points out that active core bond funds currently maintain significant curve steepening exposure relative to their benchmarks, further limiting the risk of investors cutting long-end exposure. In short, the market has already positioned itself defensively, reducing the momentum for a further sharp spike in yields.
Tactical adjustment: Take profits on flattening trades, remain cautious ahead of 20-year auction. Although fundamental analysis does not support a panicked sell-off, JPMorgan has opted for a more prudent tactical approach in its trading strategy. The bank announced the closure of its 10-year/30-year US Treasury yield curve flattening trade, realizing a small profit. JPMorgan initiated this trade in early January, citing excessive steepness in the long-end of the curve. While some mean reversion has occurred since, the curve remains approximately 6 basis points steeper than the bank's fair value model. JPMorgan believes that, considering the potential for continued high volatility in the Japanese Government Bond (JGB) market ahead of the February 8th election and the difficulty of a rapid resolution to the political risks surrounding Greenland, the risk-reward ratio for maintaining short exposure is no longer attractive, hence the recommendation to shift to neutral. Additionally, JPMorgan is cautious regarding the upcoming $13 billion 20-year Treasury reopening auction. Although yields have risen with the broader market, from a relative value perspective, 20-year Treasuries still appear expensive (over 1 standard deviation) after controlling for rate levels and curve shape. Given the significant drop in demand from investment managers at the December auction and the current lack of attractive valuation, JPMorgan expects the market will require some discount to smoothly absorb this supply. Finally, JPMorgan issued a stern warning based on technical charts. The bank's technical analysis indicates that the 5-year Treasury yield has already broken below a key support zone (3.785%-3.80%), an occurrence that happened earlier than anticipated. JPMorgan emphasizes that this breakdown signals bears have taken full control. With this key defensive line breached, the next meaningful support level for the 5-year yield points directly to 3.93%, the 38.2% Fibonacci retracement level of the move since January 2025. As long as prices fail to reclaim the lost 3.785%-3.80% territory, the bearish trend momentum will remain intact.
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