Monday, 5 March 2012
Who will buy US Treasuries this year when the zombie buyers go at strike?
There were plenty of buyers to finance the huge US government deficit until now. Before 2009 China and Japan with the OPEC in a supporting role were fighting to buy as many as possible treasuries. This even caused a (not to prove number of) 0.6% lower bond yield according to some calculations then the fundamentals were saying.
Since 2009 the FED had an irrepressible appetite for treasuries. Very fast they acquired so many that they own now 20%+ of the US Treasuries, of some issues they have 60-70%. First they bought the short durations, since Operation twist they have all durations, even the very long where the FED should have no business.
In the short run the big buyers of US Treasuries go in strike (FED) or remian at strike at best (China and Japan). The FED will stop because Operation twist is finished and QE3 will not arrive soon. China is stopped (even worse, they were selling according to the last numbers) because they want to diversify better over the world and also because the growth of their currency reserves will be lower (partly because of more imports and less exports to Europe; the government has signalled that the currency reserves are too big). Japan is getting now structural trade deficits and that will limit their buying structurally.
That menas that all three big zombie buyers at any price are out of the market soon. Other investors will have to buy those US treasuries. They have to be seduced by something else than the current low yields. It helps that there are very few long bonds and a new zombie buyer will be there: the insurer zombies that have to buy because of Solvency II to match their interest rate risk. But insurers probably have done that already for a big part, it was already way too risky not to hedge duration and not necessary with their high coverage rates.
Banks are only small buyers of treasuries in the US and individuals prbably also. Households are big buyers of treasuries but that is because households is a residual category. Individuals almost don’t buy mutual funds of sovereigns. Only hedge funds are big buyers trying to get rich because of the promise of 0% interest rates until 215 by Bernanke.
Global Macro Monitor thinks the bond vigilantes suddenly will wake up and cause an Arab spring for US Treasuries: Plosser (the super hawk of the FED) will become the hero, they will start to believe in very high rates. Or people see suddenly that the American banks are giving plenty of credit to everybody, business (an acceleration is already visible in the numbers). That will create a lot of demand for money and trigger fears of the FED and so cause higher bond yields.
There is a tail risk of an Arab spring for bond yields: the probability that 7-10 year treasurie yields in the US will go to 5%+ in 2013 is not zero.
sources: Global Macro Monitor: Is the Fed ready for the bond market’s Arab Spring? via http://www.ritholtz.com/blog/2012/02/is-the-fed-ready-for-the-bond-market%e2%80%99s-arab-spring/
Sober Look http://soberlook.com/2012/03/its-matter-of-time-before-luck-runs-out.html has a comparable view on the bond market: foreigners have to buy Treasuries in a big way and that will be a problem when China and Japan are not buying: all hope is that OPEC will buy enough, but..