Will this be the trigger?
The treasuries complex has sold off aggressively across the curve after the following flashing red Bloomberg headline:
– CHINA OFFICIALS ARE SAID TO VIEW TREASURIES AS LESS ATTRACTIVE.
– CHINA OFFICIALS SAID TO RECOMMEND SLOWING OR HALTING TSY BUYING
As Bloomberg reports, “Officials reviewing China’s FX holdings have recommended slowing or halting purchases of US Treasuries, according to people familiar with the matter.”
The reasoning given is that the market for US government bonds is becoming less attractive relative to other assets, while trade tensions with the US may provide a reason to slow or stop buying American debt.
As Bloomberg further notes “The people didn’t specify why trade tensions would spur a cutback in Treasuries purchases, though foreign holdings of US securities have sometimes been a geopolitical football in the past.”
The news has been interpreted as Beijing wanting to send a signal to the US that it is willing to use financial means to respond to any shifts in US policy on issues such as trade.
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Amusingly, with the GOP selling out, at least one deficit hawk remains: China.
The investment strategies discussed in China’s review don’t concern daily purchases and sales, said the people. The officials recommended that China closely watch factors such as the outlook for supply of U.S. government debt, along with political developments including trade disputes between the world’s two biggest economies, when deciding whether to cut some Treasury holdings, the people said.
While there is no official confirmation, this understandably has fixed income spooked. China is the single biggest foreign holder of Treasuries with $1.2 trillion in notional, so this report – if true – has massive implications.
As a consequence, US yields have more than retraced intraday losses, with the 30y trading to 2.92% and the 10y up 2bps. The rest of fixed income has followed through, with a similar spike in European yields.
The kneejerk reaction in fixed income was fast and furious, as over 35,000 10-year futures traded in the one-minute period after the news broke according to Bloomberg, sending 10Y yields as high as 2.59%, the highest since March 2017.
As a reminder, according to Jeff Gundlach once the 10Y hits 2.63%, not only is the selloff set to accelerate, it is also the level where the selling in TSYs finally hits equities too.
The news has also hit U.S. stock-index futures which have tumbled on the news, following declines in Europe.
• E-Mini futures on S&P down 0.4%
• E-Mini futures on Dow Jones down 0.4%
• E-Mini futures on Nasdaq 0.5% lower
• S&P 500 up 0.1% Tuesday, rising for 6th day to a fresh record
• VIX Index trading 1.8% higher
Meanwhile, the USD is selling off across the board following the sharp move lower in Treasuries, and FX markets are now responding. This has been perceived as a USD negative development, and as such the greenback is on sale. The Bloomberg Dollar index, BBDXY extends its drop and falls as much as 0.5% to 1,151.90.
As Bloomberg notes, the dollar initially pared losses on knee-jerk reaction to news that officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries. However, it then quickly lost momentum and deepened its losses for the day even as 10-year U.S. Treasury yield rose to fresh high at 2.5917% after a report saying China may be looking to change its FX reserves strategy.
EUR/USD snaps a three-day decline, trades near 0.6% higher at 1.2011, jumping almost 70 pips while the CHF has rallied 40 pips, although as some desks note, volumes remain low; liquidity may be exacerbating extent of recent move.
USD/JPY remains offered, drops by as much as 1.2% to 111.30, the most since May 17 and at the lowest level since Nov. 28.
Of course, for the USD, the Fed’s normalization process will naturally be affected, as monetary conditions will tighten and as noted above, has seen the USD falling away against all of its counterparts, with the heavily trade weighted EUR/USD rate swiftly back to 1.2000, but contained here for now.
The only asset which has welcomed the news so far, is gold.
Some notes of caution on the news here from Citi’s trading desk, which notes that it is not surprising that the knee-jerk reaction has been lower in USD. However, it brings up the following three points:
1. Sourcing on the Bloomberg article is unclear, citing only ‘Officials reviewing China’s foreign-exchange holdings’. Comments to this effect in the past have sometimes come from officials outside the main policymaking circles. As a theme, this is not surprising, but given unclear sourcing, this may not signal imminent shifts in policy.
2. It is hard to shift holdings. Shifts in reserves portfolios are tectonic and this partly comes down to the fact that USD selling by sovereigns reinforces broad downward pressure on the dollar, which can run counter to bigger policy aims. It is clear that the long-term trend is towards reductions of overweight USD positions among sovereigns, but in practice shifts are by several percent over several years. Indeed, the only way to begin a very rapid shift in holdings might be to abandon previous exchange rate policy entirely, but this looks unlikely.
3. Foreigners (overall) have already been paring back on purchases of Treasuries relative to other securities for some time but this has not always been well correlated with USD moves.
USD could extend its losses simply on the basis of the tailwind for losses in the broader macro-environment, but we do not view these comments by Chinese authorities as a convincing catalyst in and of themselves. Indeed, if there is any lasting signal from the comments it is that tensions around trade and financial issues may be ratcheting up and we view this as risk negative. This means that currencies such as EUR may outperform risky currencies should market focus on this issue persist.
The trigger…blah blah blah.
The final straw…blah blah blah.
Ya know, predicting the when is next to impossible, but trying to understand the why is very important.
We’ve been hearing and reading doom and gloom for a long time, some are getting impatient for the big bang and starting to doubt there will be one.
I don’t doubt there will be one, I’m happy for the delay as it allows more time to listen, to learn and to prepare.
Prepare for what? Economic collapse, people shooting it out?
I don’t think so, what I think is happening is a painfully slow transition away from the US dollar reserve status, that some apparently believe the US has had forever, to a world currency based reserve system because it would seem no other nation really wants the reserve status.
One that will include the US Dollar along with others. Oil, gold, silver, etc will be priced in the new basket currency and not in dollars.
So to prepare you should watch and learn so you’re not holding a bunch of paper, but assets that can be converted into the new whatever.
Well said, but were I you (or others), I wouldn’t wait all that long to convert those paper or digital assets into assets you can control no matter what happens to “sovereign” currencies. Sure, there’ll always be a fungible currency or we all go medieval, and it’s wise to ensure you either have some or have the means to obtain some, but when push comes to shove, this old gaffer believes that the closer control one has over them, the better.
Everybody has their eye on the Stock Market, IMHO Govco bonds are the next catalyst. When they go, the whole Ponzi comes tumbling down.
That is the scary part, because I suspect that when that happens, the Fed will say, oh, Here I come to save the day, with money that will be an electronic gimmick, that I conjured up put of thin air, and the idiotic Congress and people will go along with it, which was the Fed’s plan all along. TO OWN EVERYTHING AND PAY NOTHING FOR IT!
It may as well be me that issues the currency.
I am much more honest then the Fed too. Who isn’t though?! Even Hillary Clinton is more honest than the Fed. That is probably the nicest thing that could be said about her.
Excellent article by Darius Shahtahmasebi from The Anti Media on Trump administration supporting Ukrainian Neo Nazis with popularity in Ukraine of less than 10%:
http://theantimedia.org/trump-arming-ukraine-russsia/
Stuck – you seeing this shit? I told you so. You cannot be nice to this dumb bimbo.
Sometimes she is on and adds to the topic.
Other times…?????
Bill Blain: “This Is The Moment We’ve Been Waiting For!”
by Tyler Durden
Wed, 01/10/2018 – 08:20
Submitted by Bill Blain of Mint Partners
US Bonds hit 2.59% – this is the moment we’ve been waiting for! Normalisation and what it means for markets! In Bonds Lies The Truth!
– “Wisdom is one of the few things that looks bigger the further away it is..….”
US 10 year Treasury hits 2.59%.
In Bond Markets lies the truth. Leaving aside the false-start blips early last year and in 13/14, the current rise in rates looks the clearest chart signal rates are normalising since before the crisis. Is the Bear Break above 2.50% in US rates the signal we’ve been waiting for?
Big names on the tapes are sagely confirming it’s the beginning of the bond bear market! The End of Days!
Predictions say the 10-year bond will hit anywhere between 3-3.5% in the next 12 months. Some folk say the Japanese are to blame, while others are panicking about a bond debacle leading to a slew of defaults as sovereigns struggle to launch their front-loaded 2018 funding plans. (Some $65 bln of new government funding due this week!). Others are looking for the hi-yield bond markets to melt-down. There are some saying buy Financials as higher rates are great for their margins, while doomsters say dump tech stocks.
What does it all really mean?
Ladies and Gentlemen – welcome to the new world.
We are back in a bond environment where the realities of economic activity come back to the fore: inflation, the economy, job’s and wage growth, economic activity, demand and supply blockages and bottlenecks, infrastructure, labour relations and all the other economic forces that move markets. These will increasingly take precedence over the Central Bank and regulatory siege mentality and extraordinary monetary policy, QE and its devilish derivatives that have distorted markets these last 10-years.
And it’s global. We’ve been moving to this point for a while – since the Fed kicked off with hikes in 2015. The short-end of the US market is normal. It’s been global demand for US bonds (driven by BoJ and ECB rate policy) that held down US long rates and flattened the curve. That is now normalising as the rest of the global economy lines up behind the US and starts to grow – Global Aligned Macro Policy! Yep, I even agree on the “global synchronised growth” tag every other strategist is now so blithely throwing around..
In terms of returns, this is going to favour risk assets. AS LONG AS WE DON’T GET A DESTABILISING BOND SHOCK! Growth forecasts are rising – justifying stock market valuations. We’ve even got apparent strength in commodities – witness oil’s gains and news flow. (And oil is worthy of a whole screed of articles to figure out where it’s going.)
I asked my macro economist Martin Malone to put this fundamental shift-point into context: over the past 10-years of “crisis recovery phase” we’ve seen global central bank balance sheet growth, economic growth, plus financial assets (bonds and stocks) put some $100 trillion on the global balance sheet. Stocks are over half that gain – a fact we should not lose sight of. For all my complaints about central bank distortions, global QE is far lesser around 14%.
Martin concludes the unwind of central bank intervention can be more than balanced by continued double digit gains from stocks as normalised economic activity picks up, fuelled by the ongoing ultra-low rate and easy global financial conditions?
So if we’re now in the new economic phase, is this the boom time? Martin thinks so! He’s was bullish all last year, and called the rise in global stocks on the nail. Now he’s saying: “Max short nominal bond, max long inflation linkers, long credit risk and max long stocks” as his base calls, predicting “ significant returns as low volatility allows maximum leverage across investments.”
What are the risks within this bright new world? Of course, it never goes quite as smoothly as we’d like. There are clear risks that could derail the process. Confidence is a fickle friend. There are political risks just about everywhere. It will take you about 30 seconds to search the internet to find analysis on the likely effects of Theresa May’s government falling (rise in sterling on hopes for a second referendum (really?), or Trump not making the end of his term, or Italian Elections, too early a shift in ECB policies killing a very porcelain-like European recovery. Or an Oil Shock. Or a Climate Shock. Yep. If you want to stay awake all night, then there is plenty not to sleep about.
But, perhaps the news risks are very different. The pace of change of disruptive technical society change is faster than ever before. We’d never heard of UBER just a few years ago. What new approaches are going to change markets? How disruptive and entrophic will blockchain and evolved cryptocurrencies prove? And what about society – how long before the masses rise up to income inequality, or we see a return to the labour strife that characterised my childhood?
Meanwhile, back on planet Here-and-now; I read a fascinating article in the Pink-un about the current German economic miracle – apparently, most of Europe expects it to go for ever and a day. There are only a few doubters. Pretty much the same debate within the ECB as the pressure mounts for ending extraordinary policy as Europe normalises.
The article reminded me of the Minsky Rule: “Prolonged periods of stability lure investors and bankers into ever riskier behaviour that ultimately triggers a collapse”.
Hyman Minsky spent his career unravelling the whys and wherefores of financial crises – concluding speculative investment bubbles are part of the normal life cycle of fragile market economies. I might be deeply flawed bond trader, but understand enough to realise markets drive the often irrational behaviour of participants. It’s that uncertainty, driven by “Headology” of market inter-reactions, that makes economics the dismal and unpredictable science it is.
(For more on Headology I suggest you put down your economic text books and consult Terry Pratchett – its much more interesting. For example, his theory of “Socioeconomics Unfairness”: The reason the rich are rich is because they spend less money: a rich man buys a pair of good boots that cost £50 and last 10-years while a poor man will spend a £100 on cheap boots over the same period, and still have wet feet.)
Out of time and back to the day job… Watch the Bond Markets….
I wish I could understand this.
It’s rigged. That’s all anyone needs to know. Screwed matter what.
If interest rates rise the jig is up. The $250 trillion of global debt is a powder-keg and interest rates at 3.5% or higher will light the fuse.
Someone once said “Wake me up when it hits 3%”.
It’s my understanding that it’s impossible to service debt at those rates.
You, sir, are a very smart and perceptive guy, but as I see it you’re still a believer in math and logic, just as Robert Prechter was back some 23 years or so. I was too, but no longer. Hocus-pocus has ruled for quite some time now and I fear that it will for quite some time longer. Your observation makes complete logical sense, but how long has it been since logic and common sense have left the ballpark? It could well turn out as you suggest, but…
As stated above, I’ve begun converting U$D into productive tangibles as quicly as I can, given the restraints in place in my domestic economy,
For so long as the Fed maintains its mandate, think Davy Crockett and Thimblerig. Where’s the pea? Not under the nutshell but up the slickster’s sleeve. So it is with the bogus U$D currency!
When you do, explain it to me.
Yea, me too Wip…my IQ looks like the profile of the Alps…I’m either a brilliant mountain peak or sitting facing the corner with a pointed cap on. This one is one of my valley areas of expertise.
Historically I get out of stocks & bonds too early and back in too late…but I am still a healthy long distance runner (more of a Recon shuffler then a runner now) who has never stumbled or taken a fall!
The ‘swamp’ is dismal – not econ. Swamp econ, otoh…
But econ isn’t ballistic physics, either. So many soft sciences are jealous, envious, of the hardbodies, they spend themselves writing checks their bodies can’t cash. Econ don’t predict. At best it explains retrospectively.
“Chaos is found in greatest abundance wherever order is being sought. It always defeats order, because it is better organized.” ~ Terry Pratchett
@ admin- Well, I guess that Americans could sell their treasuries and when they recieve checks, go to the bank and demand gold or silver coins for payment, and if the bank refuses, call the Secret Service and have the banks arrested for trying to pass off counterfeit money, since Article 1 Section 10 Clause 2 states:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
Or, cash out at the bank and demand gold or silver coins. If the bank refuses, call the secret service. It is what they were originally created for.
Irwin Schiff tried something similar to that angle, didn’t work out so well……
Unserviceable? Don’t be silly.
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Then suddenly . . . . more inflation.
“Massive imp•lications” … of vendor finance … the jumbo shrimp of financestigators everywhere. No matter how many grannies get eaten, or sets of ankle-chain accoutrements are donned:
Jawbones move, create noises, vibrations.
But if wily chinee, &\or ruskee, returns to old school play, backs those rolls & reams of TP with golden mean, gravitational pull will slip heretofore static surly second-per-second bonds. & 007 job security will, too.
Drink ‘em if ya’ got ‘em. I’d a drank more if I’d’a known…(maybe if i’d’a drunk more, i’d’a known…damn ouroboros).
Your comments are worthy of investigation, but would it be too much to ask that you make them in a more coherent manner?
Apropos of nearly nothing, but please mediate a bit upon this:
Monte…interesting pair of comments. I read this – “but I see you’re still a believer in math & logic” – & gave silent applause. Then came your request for coherency.
Math, logic, ‘econometrics’, 4th Prechter perambulations, other languages puff themselves up around coherence, don’t they? Or put lips together & blow whilst navigating past graveyards, anyway.
“In “The Good Soldier” (1915), Ford Madox Ford changed the nature if the novel by telling a story that had all the gaps & slippages of actual life & memory. The fiction of an omniscient spectator of the human scene was abandoned in favor of an attempt to recreate the illusiveness of experience. In the 4-volume “Parade’s End” (1924-28), possibly the greatest 20th century English novel, Ford applied a similar technique to recreating the impact of the Great War on life in England. In moving from narrative description to the irregularities of perception & memory, Ford was aiming for greater accuracy. Instead of fabricating a coherent narrative, he presents the experiences of a single individual; but the individual is a confluence of sensations rather than a continuing actor or observer.
Ford’s literary Impressionism emerged around the same time as Impressionism in painting, & there are affinities between the two. As Impressionist painters tried not to represent things but rather to record sensations, Ford attempted to capture the transitory experiences that form our lives. Seeing the world as being made up of stable things is a kind of hallucination. Fast-vanishing scenes acquire the frozen fixity of illustrations in books & exhibits in museums. Literary Impressionism was an attempt at a new kind of realism.
…For Impressionism is a thing altogether momentary…any piece of Impressionism, whether it be prose, or verse, or painting, or sculpture, is the impression of a moment; it is not a sort of rounded, annotated record of a set of circumstances – it is the record of the recollection in your mind of a set of circumstances that happened 10 years ago – or 10 minutes. It might even be the impression of a moment – but it is the impression, not the corrected chronicle.
In this Impressionist view of things, the world that humans experience is not an imperfect representation of a reality that will some day be more fully known. Reflecting the nature of the animal that constructs it, the human world is a succession of fragments. No perfect perception of things is possible, since things change with each perception of them.
There are philosophers who will tell you that humanly constructed things can be known even if everything outside the human world is inaccessible. But the things humans make may also be unfathomable. A map can represent the physical structures of which a city is at any one time composed, but the city itself remains uncharted. This is not only because the city will have changed materially by the time the map appears. A map cannot contain the infinite places that the city contains, which come & go along with the people who pass through them. The chart is an abstraction, simplifying experiences that are incomparably more variegated. We think of cities as we think of ourselves, as stable things that recur throughout time, when in each case what is recurring is something insubstantial, a construction of thought that is fleeting & chimerical.
For Ford London was not an abiding place but a moving labyrinth…Ford was not the first to suggest that London might be unknowable. Describing his opium-fueled wanderings around the city, the early 19th century essayist Thomas de Quincey confessed to having the impression that the streets through which he wandered were phantasms. Like his fellow opium-eater Samuel Coleridge much influenced by German Idealist philosophy, de Quincey held to a kind of transcendental occultism in which sensations were ciphers of spiritual things. But there is a gap that cannot be breached between Impressionism & the occult faith in a realm beyond what is revealed to the senses. The symbolic world that humans have made is not a hermetic text, which rightly interpreted gives a secret knowledge of things. Human symbols are a scattering of dust, spread over a world that is beyond understanding.
If Romantics turn from things that humans have built in order to find something meaningful that humans have not made, Idealists return to the human world in order to escape the loss of meaning. Both are mistaken. Unknown to itself, the human mind creates worlds it cannot grasp. The places that are made by humans are as numinous & fugitive as those that appear in forest shade. Breaking the spell of diurnal perception, you can see landscapes in cities as unexpected as those that explorers discover in uncharted regions of the globe.” ~ “The Silence of Animals” — John Gray
These impressions are coherent to the perceiving impressionist – me.
‘No man can step into the same river twice.’ Or once, even, some say. Saying something the same way twice then, is either impossible – despite possible service to that whistling defense mech mentioned above – or it’s just…boring.
I’d raise on that last one. I like my boring to be not boring. Ha.
I wonder if this clarifies the coherence?
In any event, I’d bet the anchors & corners are clear enough to you: vendor finance (china financing walmart freaks, among not a few others); finance+instigators; being eaten alive outta’ house\home & into the chain-gang; soundwaves from flapping jaws running the chart one way – action – & then receding reverberations running it back the other way – reaction; the soundwaves pertaining to Chinese\Russian gold-backing of their presently fiat currencies (same waves that arguably got Saddam lynched) — & what that’d do to Bretton-Woods gravitation – & levitation – & Bond, James Bond, job prospects in defense of Bonds, T-Bonds, bills & notes, mom, apple pie, etc. Wheeee! ☻
Up up & away tempo doo wop. Not a good impression, to my ears. But they musta’ liked it. Some audiences of the day, too: when the hormones surge, whatever soundwaves are waving, that’s what the cohort tends to get resonant with. Minstrel & menstrual cycles synching….