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As if the bond market wasn’t facing enough headwinds, with inflation starting to stir and the Federal Reserve forecasting a faster pace of interest-rate increases. Now we get news that China dumped more US Treasuries in November than any time since 2011.
It’s premature to say the $66.4 billion of net sales were in response to Donald Trump’s election victory and his threats to label the world’s second-biggest economy a currency manipulator. After all, China does need to raise money to support the yuan and keep it from freefalling. But the selloff is troubling nonetheless. That’s because the US relies on foreign nations to buy its debt and finance its deficits, which helps keep borrowing costs low. Trump is likely to remind the nation that debt and deficit
spending are key to spurring the economy.
HE SAID WHAT?
Currency traders can be excused for their confused expressions these days. Less than week after Trump told the Wall Street Journal that the dollar was too strong, his nominee for Treasury secretary, Steve Mnuchin, said at his confirmation hearing that a strong currency is desirable. Robert Rubin made the “strong dollar” national policy when he was Treasury secretary under President Bill Clinton in the 1990s. Foreign investors would hardly want to buy dollar-denominated assets such as Treasuries if they suspected the government actively wanted to depreciate its currency.
MORE INFLATION JITTERS
Just how worried are investors about faster inflation? Perhaps the answer can be found in today’s auction by the US government of $13 billion in 10-year Treasury Inflation-Protected Securities. Demand was so great that primary dealers — the Wall Street banks that are obligated to bid — were left with about 16 percent of the bonds, the lowest on record in data going back to 2003. After the sale, breakeven rates on TIPS, which represent the rate of inflation investors expect in coming years, soared.
THE POWER OF ONE WORD
Traders who parse central bank statements are often compared to Kremlinologists during the Cold War. So when European Central Bank President Mario Draghi reiterated that, after keeping interest rates unchanged, policy makers ‘expect them to remain at present or lower levels for an extended time,’ the markets went into a tizzy. That’s because had he removed the word ‘lower,’ his comments would have been seen as more hawkish, according to strategists at Brown Brothers Harriman. The euro promptly tanked.
EM BOND FLOOD
It’s fair to say that emerging-market nations are very concerned about Trump’s protectionist, America-first rhetoric. The MSCI EM Index is down 0.8 percent since the election, compared with a gain of 5.80 percent in the S&P 500. Worried that their borrowing costs will only go higher under a Trump administration, developing nations are rushing to sell bonds before the Jan. 20 inauguration. Argentina was in the market today with a $7 billion bond offering, one of 17 entities, both sovereign and corporate in emerging markets, seeking to issue debt before Trump officially takes office.
TEA LEAVES
US presidential inaugurations are not always a sleepy day for markets. When Barack Obama was sworn into office on Jan. 20, 2009, the Dow Jones Industrial Average slid 4 percent, the worst Inauguration Day drop on record. Of course, there was a financial crisis going on and markets were worried about the amount of capital that banks would need to raise to stay solvent. But, sentiment wasn’t much better in the bond market, where 10-year Treasury yields soared 6 basis points to 2.38 percent as traders prepared for the US to sell records amount of debt to battle the recession. The irony is that while the amount of total US debt outstanding has almost doubled to about $20 trillion, yields are little changed at 2.47 percent. Maybe debt and deficits really don’t matter.
— Bloomberg
Robert Burgess is editor of Bloomberg Prophets