Goldman, JPMorgan Say Buy Treasurys After Last Week's Selloff

Goldman Sachs, for one, isn't buying it.

"There are a few commonly cited reasons for the selloff, none of which we find particularly persuasive," strategists led by Praveen Korapaty wrote in a note late Friday. "We are inclined to fade the recent moves on a tactical basis."

Korapaty and his colleagues picked apart these arguments one by one:

• Are Japanese investors already selling Treasurys en masse, now that the domestic yields are seen moving higher following the policy tweak? Hardly. The U.S. yield increase last week mostly occurred during the U.S. trading hours, rather than during the Asian time zone when Japanese investors are mostly active.
• Could investors be demanding a higher risk premium for long bonds, given the supply pressure from upcoming auctions? Not so far. In Goldman's view, the so-called Treasury refunding was only slightly bigger than expected, and the issuance was actually less tilted toward longer maturities.
• Does the credit downgrade actually matter? Not really.

The debt dynamics and political dysfunction in Washington that Fitch cited are well known. As such, the ratings move contained "no new information," Goldman strategists conclude.

Now, investor positions in long-dated debt are less crowded but yields are still near their highest levels of the current cycle.

That suggests "it is becoming more compelling to add duration," JPMorgan strategists including Jay Barry wrote in a note.

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