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Steve Mnuchin 'Not Particularly Concerned' About U.S. Treasury Market Despite Knowing The Guy Who Is Treasury Secretary

He's admittedly distracted, what with Louise in a small town with all those wealthier men.
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Listen, when Treasury Secretary Steve Mnuchin arrived in Davos he was shocked - shocked! - to find rich people like him there.

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See according to what he told an event sponsored by the Economic Club of Washington at the Ritz-Carlton earlier this month, he had no idea the World Economic Forum was generally associated with global elites.

“I didn’t realize that it was the global elite," Mnuchin said. Of course part of the reason Mnuchin has to play that down is because Trump has been railing about a "conspiracy" of "global elites" since he announced his candidacy. So now that he's going to Davos, everyone around him needs to at least try and pretend like they don't know what Davos is, which is about like going to a Medieval fair and acting surprised to see acne and virgins.

“I was disappointed that he’s going to Davos because I think it’s a lot of self-important people who have a totally different view of the world than he does,” Stephen Moore, the Heritage Foundation economist who advised Trump’s campaign, told CNN.

Yes, because there is no sense at all in which Trump is "self-important", right?

Anyway, Mnuchin is in Davos which means there's one more rich guy there than there was before he arrived and in the true spirit of fostering good will, the first thing he did was jawbone the dollar lower in the interest of boosting U.S. trade.


For his part, Wilbur Ross thinks only a cynical person would interpret "weaker dollar is good for U.S. trade" to mean "weaker dollar is good for U.S. trade":


But Mnuchin didn't just want to not say a weaker dollar is good for trade by talking about how a weaker dollar is good for trade. He also wanted to talk about the Treasury market amid "rumors" that China is considering slowing or halting purchases of U.S. debt.

"[I'm] not particularly concerned about the Treasury market," Steve mused, adding that “it's not an issue in all [my] conversations with Chinese counterparts."

Ok Steve, whatever you say. The context is critical here. Recall the following excerpts from Bloomberg's original story on China's thinking (China later played this down):

The market for U.S. government bonds is becoming less attractive relative to other assets, and trade tensions with the U.S. may provide a reason to slow or stop buying American debt, the thinking of these officials goes, according to the people, who asked not to be named as they aren’t allowed to discuss the matter publicly.

In other words, China may try to use the leverage inherent in its massive U.S. Treasury holdings to punish the U.S. should Trump decide to escalate trade tensions by, oh, I don't know, slapping a massive tariff on solar equipment, for instance.

To be sure, it's not at all clear whether it's feasible for China to be the marginal diversifier when it comes to an international push to decrease the share of USD assets in global reserves. As Mnuchin correctly reminded anyone who was listening on Wednesday, "the U.S. Treasury market is one of the largest and most liquid in the world." It's hard to see how China has many other options in terms of a market that can absorb their flows and ultimately, economic reality will trump (get it?) political expediency when it comes to how to allocate.

Still, one can't help but wonder if the PBoC has figured out that the low vol. regime supporting U.S. stocks and other developed market equities leans heavily on suppressed bond market vol. It's at least possible that they could trigger a bout of selling simply by helping to spook the Treasury market.

Even outside of the China concerns, there are other reasons to be wary. Thanks to the tax bill (which Mnuchin loves), Treasury's borrowing needs are set to rise materially at a time when the Fed is withdrawing support for the market. This isn't rocket science. Here's Goldman:

Just a few months after the Fed began shrinking its balance sheet, tax cuts and spending increases have been signed into law that will further raise the federal deficit to levels that are very unusual at this point in the cycle. In combination, these changes imply a large increase in Treasury issuance to the public in coming years.

That's a pretty notable technical and when combined with decreased global demand, could pressure the market.

But again, Steve isn't worried about any of that.

And why should he be? After all, he has a direct line to the Treasury Secretary who, as it turns out, isn't worried either.


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