Ad Hoc Commentary – be very vigilant of the US Treasury markets

Ad Hoc Commentary - be very vigilant of the US Treasury markets Ad Hoc Commentary - be very vigilant of the US Treasury markets 1Back in Feb 2013, after seeing 1.3% handle on the US government bond yields in the preceding summer, yours truly asserted:

“…yours truly thinks that the 2012 low in UST 10y yields is the multi-decade lows…”


Yours truly kept the faith in late Sep 2015 but over the next few months, Mr Markets (mainly Japanese life insurers and banks) threw yours truly a humbling experience by trading it down to 1.3180%!

“…“Japanese life insurers and banks are basically trying to combine the JGB market with the U.S. bond market,” Sasaki said in an interview on June 9 in Tokyo. “The people who are doing this are JGB investors, not foreign-bond investors, so it’s not like they will unwind their hedges if the cost gets higher. That won’t happen.” A hedged U.S. bond is effectively the same as Japanese currency debt for a yen investor because it takes away exchange-rate risk…”


That is about six basis points lower than the 1.3790% low of 2012, albeit just briefly. It almost made the multi-decade low view a farce:

“…yours truly holds on to his view that 2012 is the multi-decade low on yields…”


However, the last two weeks brought the US 10y government bond yields back to where it started 2016. The official mass media is blaming most, if not all of this on Trump. Quite frankly, yours truly think that we should give Mr Trump a break. Regardless who takes over the White House, Janet Yellen would have to hike rates to save pensions and other real money that suffered under ZIRP:

“…The hike’s main objective is perhaps to bail-out those that had suffered under zero-interest-rate-policy (ZIRP)…”


And the prospect of a rate hike is making it almost certain that the USD carry trade is going to unwind with vengeance, leading to US dollar strength. This in turn creates selling pressure in US Treasuries in more official circles, probably overwhelming the JGB investors:

“…US Treasuries will need to get through the headwinds of Asian central bankers digging into their savings to save their currencies and their own sovereign debt…”


With more central banks forced to dig into their savings in the forms of US treasuries, Janet Yellen’s problem had just gotten bigger. The only person that has the ability to buy more US Treasuries is probably JGB investors on steroids.


Is that perhaps why Japan just announced unlimited QE, and is that perhaps also why Japan’s Abe is the first in-person meeting for the new president?

“…The Bank of Japan fired a warning shot at the government bond market Thursday, announcing its first operation to buy an unlimited amount of securities to maintain its yield-curve target…”


“…The meeting was Trump’s first in-person meeting with a foreign head of state since he clinched the presidency last week and comes after Trump has repeatedly suggested Japan should shoulder a bigger financial burden of the US’s military forces in the region…”


In any case, the titanic of US treasuries had set sail even before Trump won, and is sailing towards the high seas. Japan had been helpful to delay the inevitable, but she is probably starting to get overwhelmed herself.


Those who compare Trump to Reagan, should realize one big and significant difference. Trump had the bad fortune of inheriting historically low interest rates, while Reagan has the good fortune of inheriting historically high interest rates. We should be wary of anyone entertaining sweet dreams of a new golden era because the bond market is not in our favor:

“…U.S. interest rates were at historic highs when Reagan took office…”


“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

James Carville, Bill Clinton’s political consigliere


The bond market is intimidating in a very real way today, and we should all be very vigilant.


Good luck in the markets.