If the Chinese were unwinding even a portion of their Treasury holdings, one would expect yields to rise. Heck, the Russians sold 100 billion and ten year yields move 30 basis points…can you imagine if the number were more like half a trillion ?
Although, to be a devil’s advocate on this, if and when the Chinese ever decide to offload a significant portion of their holdings, that paper probably never hits the market. The Fed will buy it directly and put it on their own balance sheet, rather than see yields rise a hundred or more points across the curve.
The real story in all this is why have longer term yields stayed so calm despite a US economy running on all cylinders and pushing up inflation measures. As a corollary, who has been on the buy side of all these short positions ? Its a very strange situation, which in and of itself is keeping speculative investors out of the market for the rightful fear that some government somewhere is manipulating the price of US Treasuries so as to prevent them from rising and killing off a level of present economic activity not seen since before the financial crisis.
I think the bigger lesson to be learned for investors is that if the Treasury market is being manipulated somehow by the US government or one of its proxies, investors should consider whether they want to continue underwriting a massive US debt that gets larger by the minute and probably will not be paid off ever except in grossly inflated dollars. For even if today’s manipulation is working in the favor of the buy and hold crowd, any government that manipulates its government bond prices and keeps them from falling as inflation rises is truly performing no favor for the investor.
But here again, the primary problem spawns a handful of tangential problems. Even if you decide to stop investing in the US Treasury market, what’s the alternative ? The European Central Bank is an even larger manipulator of its sovereign debt across the EU, and they even have the nerve to include the corporate market in their price fixing schemes. The Japanese and Chinese have mountains of debt almost if not worse than the US, and the rest of the world’s sovereign debt markets do not have the capacity to absorb the amounts of capital currently devoted to G7 sovereign debt.
Its certainly not a winning proposition to be invested in any of these debt markets anywhere, which probably helps to explain the bullet proof nature of most European and the US equity markets.
The shame of all this is that markets exist in part to bring discipline to politicians. But to avoid having their feet held to the fire, governments everywhere have flooded their financial markets with nearly free money, which makes it almost impossible for fund managers not to take advantage of this government largess. And so some of the most ridiculously over-valued bond and equity markets in the world continue to trade at prices far above their fundamental value, and yet no amount of selling seems to make a dent in the price-fixed veneer of the securities that trade therein.
Its probably a good time to devote investment capital to commodities markets, which have seen a resurgence of activity now that government bond markets have become so barren,
Read on ZH