Bond yields keep rising higher and higher on allegedly good economic data of questionable merit. Don’t point a finger at China.
Bond Yields
- 30-Year: 4.95 Percent
- 10-Year: 4.81 Percent
- 05-Year: 4.80 Percent
- 02-Year: 5.15 Percent
- 01-Year: 5.49 Percent
- 03-Month: 5.62 Percent
30-Year Long Bond
“Policymakers are concerned about the huge leverage that hedge funds are employing as part of the so-called basis trade.“
Never Fails – Someone Always Points at China
More on China
Has China sold any US treasuries? Likely not. Much of what China holds is hidden in State Owned Enterprises and custodied Treasuries.
What’s Going On?
China Not Responsible
Alternative Theories
How many times do we have to go over this?!
China has a trade surplus with the US. As a result of that surplus and the way China handles it, China mathematically must accumulate US dollar denominated assets, typically US treasuries and agencies.
China would prefer to buy Boeing or Apple but the US would block such transactions.
We can say that China’s surplus with the US is dropping, but it’s still a surplus.
Mexico Jumps Ahead of Canada as the Largest US Trading Partner
Please note Mexico Jumps Ahead of Canada as the Largest US Trading Partner
If you wish to give Trump credit for reducing the trade deficit with China from $375 billion to $308 billion, then also give him credit for increasing the deficit with Mexico, Taiwan, and Vietnam from $124 billion to $211 billion.
Our largest deficit is still with China as noted in Mexico Jumps Ahead of Canada as the Largest US Trading Partner
Until that changes, China won’t be dumping treasuries.
The irony in all of this silly dumping treasuries talk is both Trump and Biden would like to see trade surpluses, not deficits.
In Aggregate, There Can Be No Dumping
It is mathematically impossible to dump assets in aggregate because someone must hold every treasury, every stock, every bond, and every ounce of gold 100 percent of the time.
Individuals and fund managers can buy or sell, but 100 percent of the time someone else will be doing the opposite.
Why the Selloff?
- Because market participants, right or wrong, believe the economic data is strong and that will force the Fed to hike more. The recession theory went out the window.
- Also, there are concerns over budget deficits. Such concerns don’t matter until they do.
Regarding Dubious Data
Sentiment Changed
Regardless why, sentiment towards bonds has changed. The desire to hold them is falling. That’s what’s happening, no more, no less.
The above two points are likely reasons but there could be other reasons, or none at all.
There does not need to be a reason. Recall that in 2006 people were lined up around the corner for the right to enter a lottery to buy a condo. A week later, there were no lines and no buyers.
Sentiment changed suddenly and there was no clear reason why. In that case, the supply of greater fools ran out.
Always Something, Unless It’s Nothing
Sometimes there does not seem to be a reason for a market reaction and sometimes there is a delayed reaction.
But it appears that the bond market reaction yesterday was related to job openings.
Job Openings Rise in August, Quits and Layoffs Vary by Sector
The JOLTS Survey shows job openings increase to 9.6 million in August; hires and total separations changed little.
For discussion, please see Job Openings Rise in August, Quits and Layoffs Vary by Sector
The chart is just a blip of an upturn, but when sentiment is bad, reactions can be oversized.
What About Deficits and the Debt Ceiling?
Nothing has changed. We have deficits as far as the eye can see. That was always the case.
But things don’t matter until they do. Things now seem to matter.
No One Will Fix This
Compromise is always more spending for this in return for more spending on that.
Bnd both parties want to spend more on the military.
“Neither party will fix the deficits. Neither party will do anything about mounting debt. No one will do anything about anything because the political system is totally broken.” Mish
For discussion, please see Debt to GDP Alarm Bells Ring, Neither Party Will Solve This
There are plenty of reasons for a massive stock and bond market selloff. But it takes a sentiment change, not just reasons.
Guess What. Sentiment Changed.
We can guess why but here are a few more reasons: Biden lied about addressing inflation. People can see through the stupidity of the Inflation Reduction Act.
And illegal immigration is out of control.
Finally, the extreme polarization in Congress makes it perfectly clear “No one will do anything about anything because the political system is totally broken.”
Stocks are on deck for a major repricing lower. Don’t blame the shorts when it happens.
“China mathematically must accumulate US dollar denominated assets, typically US treasuries and agencies.”
But it must not do so at silly-low rates. Heck, unless China’s trade surplus grows as fast as the ever accelerating deficit, there’s not even enough dollars, even in China, to keep rates from rising.
Here is LA, for basic stuff like rent, food, auto insurance, gasoline, net inflation since 2020 is well over 50%. I am enraged when Paul Krugman says things aren’t that bad.
Re: “It is mathematically impossible to dump assets in aggregate because someone must hold every treasury, every stock, every bond….”
Well, what is conventionally called “dumping” is when holders adopt a “Get me out at any price” stance.
Perhaps bond yields are just normalising in the absence of QE. Prior to QE the 10 year real yield was very rarely below 2%, it’s only just recently risen above 2%.
link to deepthroatipo.com
Lots of mostly illegal border crossings from Mexicans looking for a better life. Lots of loved ones left at home. Lots of cash being sent from US to Mexico soon after illegal (but cheap or not reported jobs obtained) stimulating trade for dollar denominated goods in the US.
Makes for a big trade partnet. China is increasing trade with Mexico. There may be a proxy increase there.
Clearly, something is going to break in the financial markets.
Normalized interest rates have not been tried on the U.S. economy for 15 years.
Bankruptcies and Layoffs coming? Indeed.
What are we missing in this conversation? China needs dollars and their bankers(Japan needs dollars) to pay loans to get more loans in dollars and refinance. If China can’t put more US dollars in their system, the value of the Yuan drops and they have to create more loans in Yuan and devalue their currency. It is forced selling to support the Yuan. How does China get dollars? Sell stuff; Investment or go to the piggy bank. Do you want to sell assets that has gone down 20%? No!!!! To support their currency they have to sell bonds because no one wants their exports or to invest in China. Bonus: I don’t trust any government Stats. I would rather look at shipping rates.
good points. but i think china long ago hedged away their us bond and dollars. by entering long term purchase and lease agreements for commodity and ports……..on all continents. they layed off the paper for real goods in 10 to 100 year leases / purchases.
It is not true that “the political system is totally broken”…
but admittedly, King Chaos & the Clown Car Caucus gave it their best shot.
Villifying the DOJ, the media, the election system, all Democrats, and any Republicans that fall out of lockstep, is not leadership.
Shirley we are now at Peak Stupidity…
and the pendulum will swing back towards civility & compromise.
yeah… governance & budgeting by CR’s & omnibus bills is… “leadership”?
those fauxVaxx mandates showed true “leadership”, right?
escalating proxy wars (that can’t be won)… more “leadership”, eh?
check & see if our sparkling, thriving sanctuary cities need more of that “leadership”… lulz.
Your idea of compromise is to allow the deep state (CIA and uni-party puppets at the behest of the billionaires) to continue to screw the American people.
We are only vilifying truly corrupt people.
1) US10Y – US5Y = 0. // Yesterday congress sent a message to the yield curve.
2) The 10Y lost its umpf. It tried to poke the 5%, but failed.
3) The 13 years of ultra long debt run is over. Yesterday the gov bonk.
4) The fascist gov purges opponents, but congress limited its financial power.
There also seems to be a large section of people of all kinds who genuinely believe that there is inflation going on, when really there is mainly deflation already happening, and price rises are not the same thing as inflation. The deflation is evidenced by declining trade volumes.
You have this odd situation where the governments attest to be “fighting inflation” that doesn’t exist, whilst indulging in policies to artificially create what looks like inflation, and just ignore or out and out lie, saying the opposite of the truth about what’s happening in an apparent attempt to change reality; and… in order to fight the non-existent inflation, they raise interest rates – but they don’t… the bond market raises interest rates… and if there’s deflation rather than inflation, then you have your answer why… the bond market has diminishing confidence in the ability of debts to paid… bond defaults… historically high debt levels = high risk… companies and people are facing an insolvency cliff, and that means lots of unemployment, rising crime, rising costs for falling public sector budgets, and grasping around for foreign enemies to blame, when there’s no money or will to fight them… in short, the USA is risking becoming a bit like Argentina.
Surely it’s fairly simple… if securitised debt holders (i.e.: bond holders) believe that (e.g.: due to international and national goverment policy, such as: lockdowns, sanctions/proxywar, netzero/evscam, illegal immigration, wokefascism, etc) economic activity is declining, then they lose confidence in the ability of companies and individuals to pay the debt servicing that is the revenue of bond holders, then those bonds become less attractive to hold, and you sell.
Especially if bond holders believe that they are not alone, and that there is a general sentiment to sell bonds and hold cash and/or gold to either pounce on bargains or protect wealth, then they know that falling bond prices will drive up yields and thus drive up interest rates – which central banks pretend to control, but the data shows they just follow the bond market. Then obviously, bonds will be sold off and it becomes a self-fulfilling prophecy.
But it’s not based on nothing, there are plenty of scary charts around now showing how the situation is more like pre GFC and with towering global debt, and overleveraged banks in some jurisdictions in Europe and North America; not to mention plenty of problems in Korea, Japan, Australia, as well as the usual suspects.
An economy less sensitive to short term rates thanks to the ubiquity of long term fixed financing post 2008. Stronger than expected growth driven by wartime like deficits with no end in sight. Inflation that keeps persisting above target, thanks in part to said deficits and an inverted curve that kept the wealth effect and with it consumer spending strong. Negative carry to speculate on bonds. So many reasons why the curve should have steepened already.
Just because China runs a trade surplus with the US doesn’t mean it needs to stash the USDs it gets in your bonds.
China runs a massive trade deficit with Australia so we end up with those USDs. Now we also run a big deficit with the US so we use some of those USDs to pay you. China also uses a lot of those USDs to lend and invest in dozens of countries to acquire mines, ports, infrastructure and influence. Lots of those USDs are financing Belt and Road initiatives and creating vassals that serve China in the international arena, like here in Australia the government is worried about Chinas rising influence in our region in the various Pacific nations.
No reason bonds can’t go higher with your countries need to finance an extra billion dollars of federal debt every hour. Another 1.4 trillion/year in interest on bonds means you have a big problem that will require drastic solutions lest the bond vigilantes demand ever more higher interest.
Australia might end up with some of them but overall China is a trade surplus nation so it must accumulate treasuries (or Euro bonds etc) from nations it runs surpluses with.
…higher interest in a devaluing currency is not really higher interest – it’s probably about the same in real terms. This looks like a pathway to devaluing the main reserve currency, which has pretty stark consequences for the rest of the world… trade could get really chopped up, and that could get very ugly very quickly.
“bond vigilantes” don’t demand higher rates, the higher yields are a mathematical product of bond prices being bid lower because they are less desirable.
Gold is down $200 from the May peak.
Could it possibly be manipulated? The worst thing Bidenomics need is something like gold to rise and people point to that as a failure of his economic program.
I agree with you that the Treasury run up in yields is not China’s doing. I will disagree that it is not impossible to dump Treasuries. The US could retire the obligation without issuing any new obligations (although a surplus at this moment in time is less likely than the moon being made out of cheese).
Another possible reason for the increase in yields is that issuance of new Treasuries will hit over 60% of the increase in world GDP this year. That means that our new issuance (not including the rollovers) will suck up over 60% of the increase in world savings, which means that this money cannot be invested anywhere else for anything productive. We are getting to the point of mathematical impossibilities.
With the monstrous glut of debt coming into the Treasury market ahead, it is no wonder how Treasuries are reacting. It will require a higher yield to draw in more buyers of credit nicked US debt in the sums being auctioned.
yeah but they don’t “set” the yield… they offer their bonds like beggars at the traffic lights trying to sell junk or snacks, and the price is bid up or down depending on which side of the transaction is the beggar… in this case, it’s probably the government, which means the price of those bond snacks will be cheap as chips, and that makes the yield high… it’s set by the buyer not the seller.
In aggregate, there CAN be dumping. It’s very common. When there’s a seller who has X amount of a thing and needs to sell, but there’s only Y offers to buy, then the market will continue to find a lower price until there are X offers to buy. If the seller just needs to sell and is willing to find that new clearing price, however much lower it is, that’s dumping. Eventually, X will equal Y, but quite frequently at a significantly lower price such that new buyers are pulled in off the sidelines.
When you put more way more shares/bonds/barrels on the market than there are visible offers to buy and force the market to find a new and lower clearing level, that’s what we mean when we say dumping.
This is what happened in 2007 when super senior securitized commercial mortgage spreads rose more in a day than they had in the previous 10 years. Too many people forced to sell, not enough existing buyers, so the price kept dropping until new buyers were attracted. I call that dumping as would most of my colleagues.
Kind of an irrelevant comment though – I buy the argument here that China is not “dumping”, no matter how that’s defined.
but surely a move this big can’t be just down to technicals and misleading job reports. Seems like someone more significant can cause this. Well, we know Japan needs to shore up it’s currency bigtime!
Mish, Please explain to me why there cannot be dumping in the markets. Yes, for a transaction to occur, there must be a willing seller to match up with a willing buyer. But that doesn’t preclude a large movement, either up or down, where there is not a match of willing sellers and buyers. Isn’t that why circuit breakers were built into the markets during a dump, to slow down the decline and let everyone take a breather until sellers & buyers can again come into the market to have a transaction take place?
He said ‘in aggregate’. What he meant is that *everyone* can’t be getting out of bonds because someone has to buy in order for someone to tell.
Definitely there can be more sellers than buyers (in which case price goes down as sellers get more desperate to unload), but there can’t be just sellers since someone has to buy.
You left out my favorite bond, the 20 year treasury with a yield at 5.081%. Other people’s trash is someone else’s treasure. The next 20 Year Treasury auction is on November 16 and I hope it stays above 5% to nibble on but in the meantime it’s TLT to the moon!
link to home.treasury.gov
Any chance we get an interview with Lacy Hunt? I want to see an update on his bond views.
Ooops There is a 20 year auction on Oct 12 too. I missed that one. Choo! Choo!
TLT is down 20% in last six months. Nice moonshot.
You’re living in the past and I’m living in the future. I pity the fools that were in this knowing the Fed kept saying higher for longer for well over a year now.
Everyone is now panic selling when they should be nibbling and yes, TLT will go down further but I have no way of knowing the bottom floor so I’m tossing a few coins into the elevator on the way down and when it comes back up I will ride along…to the moon!
Choo! Choo! The 20 Year Bond money train is approaching the station.
Count me in the “higher for longer” camp. TLT could be dead money (at best) for at least the next 12 months. However, the recent bond selloff is way overdone in the short term IMO which presents a good trade opportunity. Some short-dated TLT call options seem like a no brainer to make a quick buck, but don’t mistake a hit & run trade for an “investment.”
TLT??? No, dont do it! TMV, short those bonds.
The bond crisis is only in the third or fourth inning.
This is simply a supply and demand problem. The demand side is not willing to buy up all that supply unless it gets much higher rates, because long duration bonds have gone from a risk-free investment to a high risk investment. The risk is the loss of value that those bonds trade at. Noone is yet truly worried that the bonds wont be repaid, they are selling because they are losing their asses on bond funds.
The Fed NEEDS, yes NEEDS to crash the economy without making it look like they are crashing the economy (particularly in an election year). So they are going too slow. Which is why bond prices are moving even lower and yields higher. We might even be headed for an event like the UK, when they were forced to make changes to their budget.
If you bought a razor blade, bottle of bleach, or gallon of gas recently you know that inflation is 50% per year. The only folks dumb enough to buy 5% Treasury bonds have seats at the Federal Reserve.
Well
You don’t understand trade math, despite me pointing it out.
Second, US treasuries are probably very close to a buy now, that’s how lopsided sentiment is.
I know a lot of well informed people are bullish on Treasuries of longer duration including Lacy Hunt. Are you counting on QE to be the buyer of your Treasuries? The supply appears to be endless and if the Fed actually reduces their balance sheet to $2T or below that is another $6T in supply.
I can see everything coming apart if interest rates stay high but the only buyer that I see are those forced to buy such as pension funds, banks, etc. and the Fed. Others we start looking for a return that will keep up with inflation. Unless if somehow inflation stays down even with QE, disengagement with China, lower productivity, lack of workers, large deficits, etc.
What is your alternative?
This is what eventually happens when you run low on energy that is produced at low cost.
It all started at the turn of the century – hit stride when oil hit $147 per barrel just prior to the GFC … then Drill Baby Drill… and now:
Conventional Oil Sources peaked in 2008 and the Shale binge has now spoiled US reserves, top investor warns Financial Times.
Preface. Conventional crude oil production may have already peaked in 2008 at 69.5million barrels per day (mb/d) according to Europe’s International Energy Agency (IEA 2018 p45). The U.S. Energy Information Agency shows global peak crude oil production at a later date in 2018 at 82.9mb/d (EIA 2020) because they included tight oil, oil sands, and deep-sea oil. Though it will take several years of lower oil production to be sure the peak occurred. Regardless, world production has been on a plateau since 2005.
What’s saved the world from oil decline was unconventional tight “fracked” oil, which accounted for 63% of total U.S. crude oil production in 2019 and 83% of global oil growth from 2009 to 2019. So it’s a big deal if we’ve reached the peak of fracked oil, because that is also the peak of both conventional and unconventional oil and the decline of all oil in the future.
Some key points from this Financial Times article: link to energyskeptic.com
SEE PAGE 59 – THE PERFECTSTORM : The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. Butt he critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel link to ftalphaville-cdn.ft.com
Here is LA, for basic stuff like rent, food, auto insurance, gasoline, net inflation since 2020 is well over 50%. I am enraged when Paul Krugman says things aren’t that bad.