Earlier today, Bloomberg TV blasted an amusing snippet from an article that was based on some deep revelations about what is happening in the bond market:
Here is the relevant section for the highlight-challenged:
It says: “China sells $180 billion of US Treasuries but no one notices.”
BBG TV references the following Bloomberg article “China Slashes U.S. Debt Stake by $180 Billion, Bonds Shrug“:
China was a particularly voracious participant, boosting its holdings from less than $350 billion as its economy boomed and the nation bought dollars to keep the yuan from soaring.
Now, the Asian nation is stepping back as it raises money to support flagging growth and a crumbling stock market, and allows its currency to trade more freely. The latest update of Treasury data and estimates by strategists suggest that China controls $1.47 trillion of Treasuries. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.
All of this is quite ironic considering the following ZH headlines:
- May 18: Revealing The Identity Of The Mystery “Belgian” Buyer Of US Treasurys
- June 15: China Dumps Record $120 Billion In US Treasurys In Two Month Via Belgium
- July 17: China Dumps Record $143 Billion In US Treasurys In Three Months Via Belgium
and of course:
… an article that got over 400,000 hits, half of which originated on Wall Street (you are wellcome sellside strategists).
So yes, someone noticed.
Then again, Bloomberg is also pointing out something else: the fact that all those hollow chatterboxes who have been calling for the “Great Rotation” (coughbankofamericacough) for the past 3 years have been so wrong and on so many occasions, they may well have destroyed all of their clients who listened to the call.
Bloomberg goes on to note that to “get a sense of how robust demand is for U.S. Treasuries, consider that China has reduced its holdings by about $180 billion and the market barely reacted.”
Here is the irony: the market was well-aware of China’s liquidation – which goes hand in hand with China’s record plunge in reserves and capital outflow, in fact when you hear “China capital outflow”, thing dumping of US treasury paper. What Bloomberg however was not aware of, is that there is no market, and the only marginal buyers and sellers of bonds in what was once the world’s “deepest” market, has become a centrally-planned farce (incidentally, the reason there is no liquidity is because while the Fed owns some 33% of all 10Year equivalents, the other central banks own another 10-15% – a topic we expect Bloomberg will ” notice”some time in 2016).
That said, Bloomberg is correct: as China is dumping, others – mostly banks and pension funds – are scooping up what little “high quality collateral” they can find, and in fact are hoping they can trade some massively overvalued stocks to retail investors (because “buy buy buy” as we “sell sell sell”) in exchange for their bonds. After all, in a world in which Fed reserves have zero collateral velocity, Trasurys have never been more valuable. To wit, after Bloomberg finally figured out that China is massively dumping Treasurys, it adds that “other sources of demand are filling the void. Regulations designed to prevent another financial crisis have caused banks and similar firms to stockpile highly rated assets. Also, mutual funds have been scooping up government debt, flush with cash from savers who are wary of stocks and want an alternative to bank deposits that pay almost nothing. It all adds up to a market in fine fettle as the Federal Reserve moves closer to raising interest rates as soon as next month.
“China may be stepping away, but there is such a deep and broad buyer base for Treasuries, particularly when you have times of uncertainty,” Brandon Swensen, the co-head of U.S. fixed-income at RBC Global Asset Management, which oversees $35 billion, said from Minneapolis.
Bloomberg is also correct that for the time being, China’s supply is being easily absorbed, and that this is not the first time China has spooked the quote-unquote market:
The Treasury market overcame turbulence sparked by China in early 2009, just as the U.S. was ramping up borrowing and as the Fed was about to expand the supply of dollars as part of its stimulus efforts. At that time, then Chinese Premier Wen Jiabao said his country was “worried” about its investment in U.S. debt and wanted assurances the value of its holdings would be protected.
China’s pullback from U.S. securities is “far less ominous for the prospects for the Treasury market than some sensationalists might think,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It’s the macro and policy stories that give you the big overall level of rates, it’s not flows.” U.S. commercial banks have increased their stakes in Treasuries and debt from federal agencies by almost $300 billion since March 2014 to over $2.1 trillion, Fed data show.
As we have also shown in recent months, despite Chinese and Japanese selling, when it comes to primary bond auctions, Indirect, or central bank interest, especially in benchmark paper has never been higher:
The category of buyers at Treasury auctions classified as indirect bidders, which include foreign investors and mutual funds, won a record 55 percent of the $1.2 trillion of notes and bonds sold this year, up from 43 percent in 2014.
But where things get most amusing is when one considers the ever changing narrative when it comes to Treasurys: after all it was Bloomberg, as well as every other mainstream media outlet, screaming there is a bubble in bonds, get out, buy stocks, and so on, because the economy is better and deflation is going away. And then what happened? The 2s30s curve crashed, and even as the short end is soaring on concerns of a transitory rate hike, the long end has plunged and is rapidly approaching a recessionary inversion. How convenient it is then for Bloomberg to U-turn its goalseeked narrative and to remind us that, actually, things are not all that good, and there wil be much demand for Chinese paper:
Unlike “China’s central bank, global investors want to buy,” said Toshifumi Sugimoto, the Tokyo-based chief investment officer at Capital Asset Management Co., which has $300 million in assets. “Investors like pension funds or life insurance companies or institutional investors, they want a higher yield with a high rating. U.S. Treasuries are very attractive now.”
But… But… Great Rotation… Economic Recovery.
That depth of demand may stand the market in good stead as the Fed moves closer to raising interest rates. “I don’t see an egregious back-up” in yields happening, said Gemma Wright-Casparius, who manages about $50 billion in Treasuries at Valley Forge, Pennsylvania-based Vanguard Group Inc. “It’s a deep liquid market, it’s a safe haven and it’s a high-yielding asset right now.”
Or, precisely what we said in the summer of 2013 “but no one noticed”…