Chinese

Bluff?

"We Understand The Chinese Government Has Halted Purchases Of US Treasuries"

On Friday, we reported that among the five "nuclear" options available to Beijing to retaliate against Trump's latest $100BN in proposed import tariffs, was the choice whether to sell US Treasuries. But what if Beijing did not want to unleash a full-blown market nuke, and instead was hoping for a targeted, EMP hit? 

Then it would simply stop buying US paper, instead of dumping it outright; in the process it wouldn't hurt the US too much - avoiding a furious tit-for-tat response - but would still send a clear signal to the White House, whose fiscal spending plan will more than double net Treasury issuance this year from under $500BN to over $1 trillion, and which needs every possible marginal buyer of US paper, both domestic and foreign.

  

As of 4/11/18 yield is 2.79%

DYI:  The buyer of last resort is the Federal Reserve digitally ginning up money out of thin air to purchase the forever onward budget busting deficits growing our national debt by leaps and bounds.  Of course the Fed’s will eventually allow their Treasury horde to roll off their portfolio as the bonds mature.  This will only have a net decrease if they are allowing a greater number of bonds maturing as compared to purchases.

I see this as a temporary maneuver on China’s part as where will they place their excess earnings due to their positive balance of trade?  Gold and Euro’s is a possibility along with the Swiss Franc.  As wonderful as these three options are China needs size with a high degree of liquidity.  And as it stands today that requirement is full filled by buying the American dollar.  Simply put the U.S. dollar is the best looking horse in the glue factory.

Eventually interest rates will normalize when the Fed’s sheds their swollen balance sheet.  This will most likely be accomplished by allowing the bonds to mature and retiring from circulation the digitally ginned up dollars.  This will happen in a push pull fashion moving rates up in zig zag or saw tooth manner and with recession(s) temporally stalling an increase in rates.  The only way I see rates going below 1.4% low set in 2012 (as measured by the 10 year T-bond) is for a calamity proportion recession/depression deflationary smash.  It is a possibility and if this occurs rates could very well go negative.  The U.S. has enough imbalances so it must be placed on the table as a possibility.     

DYI