Bonds: Total Market

(New York)

Yields have been pinned for several weeks now. Ten-year US Treasuries are currently trading around 2.86% and have been at that level for some time, while thirty-year bonds are also under 3%. The typical reasons cited for this are the looming trade war and fear of recession, which makes the bonds look attractive. However, there may be a much less obvious reason yields are staying low—a poorly known tax benefit being exploited by institutional investors. Pension funds have been devouring Treasuries as the new tax cuts incentivize companies to contribute majorly to their pension funding. And since pension funds tend to invest in long-dated bonds as a way of matching their liability timeline, long-dated Treasuries have seen massive inflows.

FINSUM: There has been so much speculation about yields being pinned, and one of the main reasons behind it seems to be a tax incentive. Very interesting to know that it is not necessarily the economic environment keeping downward pressure on yields.

(New York)

Only those watching the bond market closely would have noticed it, but a huge Treasury meltdown may have started yesterday. One month US Treasury bills saw yields jump an eye-popping 10 basis points in an instant. The incident followed one of the worst Treasury Bill auctions in a decade, where there was little demand from investors. The two possible answers for the terrible auction are the unusual date (it was moved because of the Fourth of July), or that China has indeed slowed or cut off its purchases of US debt.

FINSUM: The US better hope this bad auction was just a fluke of the calendar. That view is supported by the fact that longer-term Treasury auctions at the same time were much closer to normal.


One of the big downside risks for the US in its current trade war with China concerns the fact that Beijing owns $1.18 tn of US Treasuries. They also own billions of US mortgage bonds. The big question is whether they will decide to use such ownership as a weapon against the US. For instance, if they sold off large quantities of the bonds, it could send US yields spiking. However, it seems unlikely they would do say for a number of reasons. Firstly, it would hurt the value of their own holdings and all their other Dollar-denominated assets, and it would engender a lot more punitive action from the US. Some consider it the economic equivalent of “mutually assured destruction”.

FINSUM: This is a grave risk for the US because of how it would push up rates all through the economy, but we do not think the trade war has gotten this serious yet.

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