Displaying items by tag: Treasuries

(Beijing)

China is beginning its retaliation against the US’ increasing intense trade policy. The country is unloading its holdings of US Treasuries at the fastest pace in two years alongside the big rupture with Washington over trade. Its US Treasury bond holdings are one of China’s arsenal of weapons to retaliate against the US’ tariff hikes. According to Deutsche Bank’s chief economist, “The sheer size of [China’s] reserves and that this is even becoming a conversation means the market should take it seriously”. The country owns $1.12 tn worth of Treasuries.

FINSUM: This is quite a risk for the US as someone would have to absorb all those sold assets, and if they flooded the market, it would cause major volatility and sharp yield rises.

(New York)

One of the most famous names in bonds, Jeffrey Gundlach, has just put out a bold statement. Gundlach thinks there is forthcoming trouble in markets and he thinks it is the Fed’s fault. Specifically, Gundlach thinks the bond market is set for a lot of volatility. “interest rates cannot maintain the low volatility they have maintained over the last eight years”. To be clear, Gundlach is not calling for a recession, but says “But I am starting to think it is much less of a lock that there won’t be a recession before the next recession”.

FINSUM: There are two conflicting ideologies here. The Fed thinks volatility is largely an extension of the economy and policy, both of which it feels it can control to an extent. Gundlach and many other investors think there are underlying forces in the economy and markets that can only be pacified for so long. We think they are both right to an extent.

(Washington)

Don’t look know, but market could be facing a big risk in September. Investors will remember that Congress voted to suspend the debt limit until March 1st. That date has come and passed and now the Treasury is using extraordinary measures to meet the US’ payment obligations. However, it says it will exhaust those options by September, meaning the US could end up in a major cash crunch.

FINSUM: Get ready for another early autumn political crisis over the budget, deficit, and debt ceiling.

(Washington)

Something very odd is going on in the minds of investors. Data on the economy continues to come out very strongly, with Q1 growth at 3.2%, and the market are nothing short of astonishing, up 25% since its December low. But at the same time, many investors and analysts think the Fed will cut rates. The reason why is disinflation, or the fact that the inflation number refuses to rise to the Fed’s target. Looking more broadly, you also have weakening in China and a slowdown in Europe, so there are macro headwinds that could wound the US. Analysts tend to fall in one camp or the other on hikes, with some, like Scott Minerd of Guggenheim, calling the idea “plainly wrong”.

FINSUM: It is very hard to predict what the Fed will do because their u-turn earlier this year caught everyone by surprise. Our bet is that if the current data holds steady, there won’t be any hikes.

(New York)

For the last eight weeks or so we have been running a “recession watch” theme in articles, but the data is lately looking so good that we are feeling silly. New GDP data was released today and it was nothing short of a blowout. The US expanded 3.2% in the first quarter despite a government shutdown and winter weather. The growth was almost a full percentage point ahead of expectations and well beyond the 2.2% growth of the fourth quarter.

FINSUM: These recession fears seem pretty well put to bed in our opinion. Back in Q4, the declines in a number of indicators seemed to show we may be headed for a recession, but the strong reversal in data suggests this was just an aberration. The market doesn’t seem convinced, though, as Treasuries rallied on this news!