Tomorrow the quarterly GDP figures will be released. This made bond traders nervous so yields went up sharply to 1.86%, some 10 basis points today for the ten year Treasury, making a Treasury ETF “TLT” go down in value by 1.1%. Typically the day before important data releases are scheduled the market gets nervous and does this. The fundamentals for bonds imply that they are fairly priced. The consensus view is that a recession is unlikely and that GDP, which has been 1.3% in the first half of the year, will go back to its four year average of 2.3%. However, my opinion is that troubles in OPEC countries, EU, and China imply that foreigners holding U.S. Treasuries may need
Congress has passed a bill into law that would allow the families of 9-11 victims to sue Saudi Arabia for the 9-11-2001 attacks. The Saudis threatened to sell their holdings of U.S. Treasury bonds. The effect on the global markets will be minimal. Once the bonds have been sold then The Saudis will probably replace the sold items by buying an asset class that is very similar and thus the total impact on global investment grade bonds will be minimal. Liquid assets such as G7 Sovereign debt tend to be fungible commodities so while one party is busy selling U.S. Treasuries and buying UK Gilts another party is buying U.S. bonds until an arbitrager notices a slight imbalance and reallocates
The Saudi government is threatening to sell off their holding of $750Billion of U.S. Treasuries if Congress passes a bill regarding sensitive matters about the 9-11 incident. How would this affect the markets? A massive sale would depress bond prices, making rates go up. This would make the dollar go up in value since higher yields would create an inflow of foreign investors. The Federal Reserve would probably be the buyer of the Treasuries to offset the effect of the sale. Then if the Fed acts there will be no effect on the market except a new supply of freshly printed dollars will be in the market looking to invest in something. It may be after calming down and thinking
China has been selling $250Billion of U.S. Treasuries, about 12% of what the central bank owns, but this is only 2% of all of our Treasury issues and this will be offset by growing demand for Treasuries in EM countries, including the private sector in China, to own G7 sovereign bonds. China’s sale is roughly the same as three or four months of the volume of Quantitative Easing that recently ended so it is not that much. As the U.S. economy gets better then the federal deficit gets smaller and thus less Treasuries are issued. This can create a recession in EM countries who view Treasuries as a type of global “money”. There have been suggestions by some economists that
The Treasury market is now more prone to sudden shocks than a generation ago. In modern times various things like fast electronic trading of Treasuries, restrictions on banks trading in Treasuries that reduced liquidity and excessive Federal Reserve Quantitative Easing that encouraged excessive speculation in stocks have changed the nature of the Treasury market. Jamie Dimon said the Treasury Flash crash of a year ago should have only happened once every three billion years. Ever since Greenspan cut rates to ease conditions when the stock market crashed 23% on October 19, 1987 the Federal Reserve has been overstimulating the economy. The result is that it has encouraged speculation in securities. The greater they make the bubble expand then
The Telegraph ran an article “G20 currency truce shortlived as Japan mulls foreign bond buys” by Ambrose Evans-Pritchard. The article warned that Japan could devalue its Yen by buying foreign bonds and that China would then also do that to prevent the Yuan from going up.