miércoles, 8 de julio de 2015

miércoles, julio 08, 2015
Slower US bond demand may urge Fed rethink

China’s Treasury buying is likely to ease, forcing rates higher

by: Henny Sender 
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Shredded currency surrounds the seal of the U.S. Federal Reserve in Washington, D.C., U.S., on Wednesday, April 24, 2013. The S&P 500 has surged 134 percent from a 12-year low in 2009 as corporate earnings beat estimates and the Federal Reserve embarked on three rounds of bond purchases to stimulate the economy. Photographer: Andrew Harrer/Bloomberg
The world looks increasingly scary, but US Treasuries, the safe haven investment of choice, have endured a rough few months.
 
At the halfway mark of the year, strong gains from the first quarter have been wiped out with investors currently nursing losses on Treasury debt with a maturity longer than seven years.
Overall, US government bonds rank number 27 in terms of total return among global equity and bond markets from January through July 1, according to data from Merrill Lynch, with a negative return of 0.1 per cent. By contrast, Russian bonds stand almost 30 per cent higher.

Two years since the “taper tantrum”, when then Federal Reserve chairman Ben Bernanke spooked markets by alluding to the end of unconventional monetary policies, long-dated yields, which move inversely to prices, have marched higher. From a low of 1.82 per cent in early April, the 10-year note yield recently flirted with 2.5 per cent, though with the latest developments in Greece, 10-year notes rallied to 2.38 per cent.

The shift has come against a backdrop of the Fed’s near zero interest rate policy extending far longer than most market participants ever expected. But now, assuming the markets do not fall apart over Greece, most analysts believe the Fed will finally raise rates, possibly as soon as September — the first step in what is meant to be an orderly and very gradual increase in rates. Expectations of a modest pace of monetary tightening were reinforced this week after data revealed the US economy created 223,000 jobs in June, with lacklustre wage growth.

Yet, for all the confidence bond investors may have about the pace of rate hikes not upsetting US Treasuries, it is easy to come up with scenarios involving even tougher times for this $12.5tn debt market with unanticipated changes in demand and supply that could drive yields sharply higher.
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China, Japan and Saudi Arabia have been among the biggest foreign holders of Treasury bonds. All three have a mix of economic, financial and strategic calculations behind their holdings. But the scale of purchases — especially from the Chinese — cannot be taken for granted. Moreover, the supply of Treasury debt is expected to increase dramatically as entitlement spending rises in coming years.

All three nations have trade surpluses with the US and have to recycle their dollars in financial markets that have big enough scale to absorb those dollars. Moreover, two of the three, Japan and the Saudis, have an implicit understanding with the US: you provide a defence umbrella for us and we buy your Treasuries. And then there is China.

This year, the Chinese have been solid buyers of US government bonds and remain the largest foreign holder in the market with a $1.26tn portfolio. Virtually all Treasury and Fed officials assume that Beijing will continue to recycle its surpluses into US Treasuries, because to not show up at the auctions or to sell existing holdings would mean self-imposed losses. But such thinking assumes China acts like a hedge fund, seeking to avoid mark to market losses. But China does not care about the market value of its holdings as long as the US does not default because it can hold these bonds until maturity.

Moreover, sovereign investors are not purely financial investors, they have other motivations.
 
Friction between the US and China is on the rise. Even though the IMF has decided the renminbi is now fairly valued (and has appreciated almost 35 per cent on a trade weighted basis since 2005), Treasury officials still claim that China is manipulating the value of its currency.

Even setting aside politics, though, there are reasons to anticipate fewer Treasury purchases from the mainland over time. Today, China has huge foreign reserves — about $4tn. But already its surplus has shrunk to about 2 per cent, leaving it with fewer dollars to recycle. At the same time, Beijing will need to spend a greater portion of its reserves on the needs of its ageing population and to support costly international initiatives, including the New Development Bank and the Asian Infrastructure Investment Bank.

“Reserve accumulation will stop, and there will be a rebalancing both between dollar holdings and holdings of other currencies and reallocation within its holdings of dollars,” says Haibin Zhu, chief Chinese economist of JPMorgan in Hong Kong.

In other words, the eventual trajectory of US rates may be a far cry from the orderly projections of the Fed.

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