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Originally published May 15 at 5:27 p.m. EST
Buying totaled a net $24.4 billion, the most since March of last year and follows a steady stream of selling that saw net liquidations of $326 billion in 2016 and $20.5 billion in the first two months of this year. This follows net selling of $20.3 billion in 2015. Most of the swing came from the Japanese who stepped up with $31.2 billion of buying of notes and bonds after seven straight months of selling. The Chinese were net sellers of notes and bonds but still increased their total holdings of US Treasuries by $28.0 billion due to the purchases of short term bills which is really only a short term parking of cash. Russia also added to its holdings by the most since 2014.
While March began with the 10-year yield at 2.39% and ended at the same yield (!), intra month the yield did spike to 2.63% in the heart of the reflation Trumponomics trade. Perhaps the selloff in mid-month was enough to bring back foreign buying.
Of note too, it got cheaper to hedge out the U.S. dollar exposure for yen based buyers as the yen cross currency basis swap went from -45 bps to -33 bps. (The high cost of hedging is a subject I have discussed in the past -- which led me to reduce the relative importance of negative European bond yields). It got as expensive as -90 bps last November. So far the large amount of foreign selling hasn't mattered since the end of 2014 in part because of Fed QE reinvestments, the blind search for yield from many and an economy that really can't break out of its 2% growth range.
Thus, a real test will be, assuming foreign selling continues to be the trend scenario, what happens when the Fed begins quantitative tightening after another few rate hikes (assuming they follow through) and whether Trumponomics can overcome that.
I would add to that all the Treasury supply that is going to be building in the years to come as we approach again $1 Trillion budget deficits.
Takeaways and Observations
Originally published May 15 at 3:49 p.m. EST
Divine Being Divine-- a nuanced gem!