There’s something interesting going on in these Wall Street Journal articles (Money & Investing and Deal Journal) today about how corporate bonds now sometimes trade inside of Treasuries. Or somethings interesting; one thing that’s going on is, like, why the day after the election? One possibility is that the message here – which the Journal is helpfully conveying from bond investors to the government – is “see? get your fiscal cliff shit together or soon you’ll be pricing your bonds outside of Google, and you don’t want that do you?”
There may be a side helping of, like, annoy modern-monetary-theory bloggers; from a certain viewpoint this graphic is a hot mess of category mistakes1:
BUT THE GOVERNMENT HAS A PRINTING PRESS oh never mind. Maybe Exxon does too, I don’t know.
“We’re not overweight Treasuries. We’re certainly underweight Treasuries, but that does not mean we don’t own lots of other bonds. German bunds and Canadian bonds are rallying. We simply think those are better alternatives. It does not mean as well that we’re not a little bit shy in terms of duration…Bloomberg’s numbers as of last night show us beating 2/3’s of managers. We’re having a good year…so don’t cry for Pimco.”Read more »
It’s “a no brainer” to sell short Treasuries, Nassim Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”
No wonder they want to invent a reserve currency that has some merits over the United States Dollar. It would be a form of methadone treatment:
China, the U.S. government’s biggest creditor, increased its purchases of American securities in February just weeks before the country’s officials questioned whether such investments were safe.
While China’s purchases slowed and most were in short-term Treasury bills, the country remained the largest foreign holder of Treasuries after its holdings rose 0.6 percent to $744.2 billion, according to a monthly report released in Washington.
We have long considered hollow the cries that the Chinese might abruptly cut off their large-scale purchasing of Treasuries. To do so would be cutting their own throat as their own prosperity is tied quite directly to their ability to find and fund customers for their chief exports (cheap labor and manufacturing). It is worth pointing out that Chinese leaders are not afraid of being deposed. They are afraid of being shot if they break the grand bargain they struck with their subjects: keep us in power, we’ll give you a taste of capitalism and the trappings of upward mobility, but we will manage that social stuff and political voice for you. China Bought More U.S. Securities Even as Its Concerns Grew [Bloomberg]
Our spy on a Treasuries desk has some interesting things to say via the mailbag about the bond market in the imminent face of $300 billion in quantitative easing by proxy:
Wall Street Dealers are giving the Treasury the biggest “fuck you” on new Treasury debt. There’s an auction today and a buy program tomorrow. Since Bernanke just announced that the Treasury is buying bonds, Wall Street- the dealers en masse- are basically refusing to show a good bid but then taking out a huge profit out of the Treasury. You want to talk 90% taxes? This is unprecedented.
Hell hath no fury like a bond trader scorned? We aren’t so sure. The UK had similar problems today.
The U.K.’s effort to buy government debt wasn’t enough to prevent today’s failed auction of 40-year gilts, the first time that the government failed to attract enough bids at a sale of nominal debt since 1995. Investors bid for 1.63 billion pounds ($2.4 billion) of 4.25 percent notes, less than the 1.75 billion pounds offered.
“The failed gilt auction doesn’t bode well for Treasuries,” said Michael Franzese, head of government bond trading for Standard Chartered in New York. “It is a supply issue on top of that. Is the buying that’s happening today by the Fed going to offset the selling that’s going on today and tomorrow by the Treasury?”
It is popular to speculate about what might happen if China ever grew tired of providing the United States with cheap capital to fund [mass consumerism/the real-estate bubble/our exorbitant lifestyle/our fat/flat-screen televisions/the deadly "greed virus"]. We think these questions overblown. It might be simplistic to think about Sino-American economic relations as China lending us money at low rates so that we can buy massive amounts of cheap exports that the Chinese would never want and could never use, thereby keeping their unemployment rates low and providing a nice return on their investment. Then again it might not.
Chinese leaders are not as concerned with staying in power as not being shot in the back of the head. The bargain the Party has struck with its subjects (“Leave the political power to us and we will deliver you a measure prosperity via ‘capitalism lite,'”) doesn’t leave much room for maneuver if the prosperity bit starts to slip. It isn’t an accident that the government recently made some gentle reminders to its humble citizens (and not so humble students) that another Tienanmen wouldn’t be tolerated. So, dump treasuries in bulk? Not so fast. But they will, we think, try to get some mileage out of the perception.
The premier said Beijing expected to see results from President Barack Obama’s economic recovery plan but expressed concern that massive U.S. deficit spending and near-zero interest rates would erode the value of China’s huge U.S. bond holdings.
That’s right, Mr. President. You work for Beijing now.
China is the biggest holder of U.S. government debt and has invested an estimated 70 percent of its $2 trillion stockpile of foreign exchange reserves, the world’s largest, in dollar assets.
“We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries.
“I would like, through you, to once again request America to maintain their creditworthiness, keep their promise and guarantee the safety of Chinese assets,” Wen said.