"US bonds were crushed on Friday on the back of stronger-than-expected payroll data. Long-bond yields jumped 21 basis points (bps) to an almost 23-month high 3.71%. Ten-year yields rose 24 bps to 2.74% - the highest level since August 5, 2011. Yields on benchmark mortgage-backed securities (MBS) surged 30 bps during the session to a 23-month high 3.69%. The spread between 10-year Treasury yields and benchmark MBS widened six on Friday to a one-year high 95 bps. Notably, MBS yields were up 75 bps in 14 sessions and 140 bps since May 1.
With unprecedented outflows from the bond complex coupled with notable global central bank selling, the bubble in US fixed income would appear in serious jeopardy. And while analysts and money managers will continue talk of a "fair value" range for Treasury securities, for the time being flow of funds analysis trumps valuation. Will foreign central banks continue reducing their enormous holdings of US Treasury and Agency securities? How much leverage has accumulated throughout US fixed income - especially in corporates, MBS and municipal debt? How long until some hedge funds are in trouble? Redemptions coming? Derivative problems? Will investors continue their retreat from US fixed income mutual funds and exchange-traded funds (ETFs)?
A few data points are in order. Since the end of 2007, Rest of World (ROW from the Fed's Z.1) Treasury holdings have jumped $3.325 trillion, or 140%, to $5.701 trillion. Over this period, "official" central bank Treasury holdings were up $2.233 trillion, or 134%, to $4.059 trillion. I have previously highlighted the extraordinary expansion of central bank international reserve assets (as accumulated by Bloomberg). Since the end of 2007, international reserves have inflated $5.061 trillion, or 84%, to $11.122 trillion. The Fed's $85 billion monthly QE suddenly doesn't seem as powerful.
Ongoing selling by foreign central banks could be driven by two key dynamics. First, one would think (thinly capitalized) central banks would seek to contain losses on their outsized bond holdings. Keep in mind that the higher bond yields jump, the more individual central banks will need to monitor the scope of losses and the degree of capital impairment. Second, "developing" central banks will most likely be forced to sell Treasuries and other bond holdings to fund investor and "hot money" flows exiting their markets and economies".
Source: Asian Times
With unprecedented outflows from the bond complex coupled with notable global central bank selling, the bubble in US fixed income would appear in serious jeopardy. And while analysts and money managers will continue talk of a "fair value" range for Treasury securities, for the time being flow of funds analysis trumps valuation. Will foreign central banks continue reducing their enormous holdings of US Treasury and Agency securities? How much leverage has accumulated throughout US fixed income - especially in corporates, MBS and municipal debt? How long until some hedge funds are in trouble? Redemptions coming? Derivative problems? Will investors continue their retreat from US fixed income mutual funds and exchange-traded funds (ETFs)?
A few data points are in order. Since the end of 2007, Rest of World (ROW from the Fed's Z.1) Treasury holdings have jumped $3.325 trillion, or 140%, to $5.701 trillion. Over this period, "official" central bank Treasury holdings were up $2.233 trillion, or 134%, to $4.059 trillion. I have previously highlighted the extraordinary expansion of central bank international reserve assets (as accumulated by Bloomberg). Since the end of 2007, international reserves have inflated $5.061 trillion, or 84%, to $11.122 trillion. The Fed's $85 billion monthly QE suddenly doesn't seem as powerful.
Ongoing selling by foreign central banks could be driven by two key dynamics. First, one would think (thinly capitalized) central banks would seek to contain losses on their outsized bond holdings. Keep in mind that the higher bond yields jump, the more individual central banks will need to monitor the scope of losses and the degree of capital impairment. Second, "developing" central banks will most likely be forced to sell Treasuries and other bond holdings to fund investor and "hot money" flows exiting their markets and economies".
Source: Asian Times
