Does Your Dog Bite? Trade War May Yet Spur China to Sell Treasuries as Yuan Tumbles (China Might Bite At Selling Treasuries)

Will China bite at selling their US Treasury holdings?  

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(Bloomberg) — The idea that China would dump its $1.1 trillion of Treasuries to retaliate against U.S. tariffs is often dismissed as improbable. It’s seen as a nuclear option that would inflict more harm on China’s economy than America’s.

Yet the tensions rippling through global financial markets could still lead Beijing to reduce its stockpile in the $15.9 trillion Treasuries market — not to retaliate, but to defend its currency if it goes into a free-fall. The offshore yuan has slumped 2.6% this month to about 6.92 per dollar as the trade standoff intensified, reaching the weakest since December.

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The specter of Treasuries being deployed as a weapon in the trade spat surfaced via a tweet from a Chinese journalist on Monday that said the nation’s scholars are “discussing the possibility of dumping” U.S. government debt. The post came after trade negotiations last week ended without a resolution. Beijing on Monday said it will increase levies on some American goods in retaliation for the latest U.S. tariff hikes.

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“China selling Treasuries is a risk, but it would have less to do with any retaliation they might pursue in response to tariffs and more to do with managing their currency,” said Gene Tannuzzo, deputy global head of fixed income at Columbia Threadneedle Investments. “But if the capital account is leakier than they want it to be and they have to defend the yuan, then they’d need to be selling Treasuries.’’

Macquarie Securities Ltd. says China is unlikely to let the yuan’s slide get out of control, as it could lead to capital outflows and sharper depreciation. In 2016, Chinese authorities unloaded about $188 billion of Treasuries — 15% of the total — as the yuan sank almost 7% amid capital flight.

Tannuzzo sees an additional 7% decline in the yuan as likely without a trade deal, for a combined slide in line with that seen in the second and third quarter of 2018, when a previous bout of trade angst roiled markets. Last year, China’s Treasuries holdings fell by about 5%, second in scale only to the 2016 reduction.

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China’s Treasuries holdings are still more than double where they stood before the U.S. recession and comprise about a third of the country’s $3.1 trillion in foreign-exchange reserves. It taps those coffers to manage its currency.

The Chinese journalist’s tweet on Monday barely registered in the bond market, as it came amid haven buying as stocks slumped in the face of the trade impasse. The benchmark 10-year Treasury yields 2.38%, compared with 2.68% at the end of December.

U.S. officials have warned China against deliberately weakening the yuan to combat the hit from U.S. duties. But most strategists say China’s painful experience with devaluing the yuan in 2015, which prompted an exodus of capital, is likely to dissuade such a move.

Sebastien Galy, senior macro strategist at Nordea Investment Funds, also sees the risk that China will trim its Treasuries pile if it needs to prop up the yuan to prevent repercussions for its economy.

“If there is no trade deal, China’s currency will come under further pressure and that’s a problem for their funding, so they will need hard currency to intervene to prevent the weakening,” he said.

Last Resort
But the consensus is that any further selloff would be a last resort. For one thing, China would struggle to find other places to park its cash. But it would also have to consider the consequences for its own economy, if a stronger yuan undermines exports.

Even if China did dump Treasuries, yields might not rise that far. Any such move would probably trigger risk aversion that drives other investors to snap them up as a haven. What’s more, the Federal Reserve is about to start adding to its Treasuries again, providing a buffer to the marketplace.

 “Whenever tensions emerge between the U.S. and China, questions arise as to whether China would sell off its Treasuries in retaliation,” said Mark Sobel, a former Treasury official and now U.S. chairman for the Official Monetary and Financial Institutions Forum. “This has been the dog that didn’t bark.”

Well, maybe China won’t bite at selling their US Treasury portfolio, but the US Treasury yield curve slope (10Y-3M) has been steadily declining.

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And then we have advanced economies trade YoY sinking to Great Recession levels.

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Let’s see if China bites.

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Trump Seeks to Enlist Fed in His Trade Fight Against China

After bashing The Fed and calling for rate declines, Trump is doubling down by asking The Fed to counteract China’s stimulus attempts to survive the ongoing trade war.

(Bloomberg) — President Donald Trump pushed the Federal Reserve to “match” what he said China would do to offset economic hardship being caused by tariffs as he sought to draft the U.S. central bank into his simmering trade war.

“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,” the president said in a tweet Tuesday. “If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!”

His explicit call for the Fed to be a weapon in the fight against China is a clear escalation in Trump’s repeated efforts to pressure the U.S. central bank to stimulate the U.S. economy, even though growth is solid and unemployment is at a 49-year low. The remarks may also help him deflect blame onto the Fed if the escalating trade dispute causes the U.S. economy to stumble as he seeks reelection in 2020.

Export and import price growth for the US is about zero.

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True, soybean futures have declined, but rose today.

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The Dow has made a sudden increase following a mini-crash yesterday. That is volatility!

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Yes, while The Fed has killed off volatility, Trump has created volatility on his own (along with the Chinese government).

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Uhm, markets are already anticipating rate cut in late 2019. But is The Fed tough enough on China?

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Deutsche Bank Seeks Credit Boost as New Debt Swaps Start Trading (DB Fighting To Stave Off Systemic Failure)

Reading endless stories about the China-US trade standoff are tiring. Moving on to more banking-related news …

(Bloomberg) — German banks may get some relief in credit markets as new insurance contracts start trading.

Deutsche Bank AG has the most to gain because stress in the credit-default swaps market has pressured borrowing and trading costs. Swaps covering senior-preferred debt will also align German contracts with those in France and Spain.

“This will lower the cost for counterparties hedging exposures to Deutsche Bank and more accurately reflect the position for counterparties and clients in the hierarchy of creditors,” James von Moltke, the lender’s chief financial officer said in a statement. “It also creates a level playing field for German banks versus their EU and U.S. peers.”

Swaps on Deutsche Bank’s safest securities, which are protected against losses, were quoted at about 95 basis points at 11 a.m. in London, according to CMA. That compares with about 180 basis points on senior non-preferred contracts. It’s unclear if any trades have taken place.

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If we looks at Deutsche Bank’s 5Y Senior and Subordinated CDS, we see a dramatic divergence in the CDS spreads.

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For comparison, here are the senior and subordinated CDS curves for US bank Bank of America. Both curves are considerably lower than DB’s curves.

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Deutsche Bank’s equity has hovered around under $10 per share since December 2018.

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Deutsche Bank’s CET1 (Common Equity Tier 1 (CET1) is a component of Tier 1 capital that consists mostly of common stock held by a bank or other financial institution. It is a capital measure that was introduced in 2014 as a precautionary means to protect the economy from a financial crisis. It is expected that all banks should meet the minimum required CET1 ratio of 4.50% by 2019) is solid at 15.70.

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At least the non-performing assets on DB’s balance sheet are shrinking (but remain a headache).

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Compare DB’s NPA to Bank of America’s NPA. BAC has managed to shrink their non-performing assets (aka, loans) to almost pre-financial crisis levels. DB is still considerably above their pre-crisis levels

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Chris Whalen is correct. Deutsche Bank’s problems ARE Amercia’s problems as well. And you can see why Brexit is so important to German banks.

Bitcoin Headed for $400,000, Hedge fund Manager Mark Yusko Predicts

I always resist making hysterical predictions, but apparently trader Mark Yusko has no reservations.

FxStreet: Yusko maintains that Bitcoin has the potential to unseat gold. 

“Bitcoin is much easier to transport. It is much easier to divide,” Mark Yusko.

Experts are currently staying off prediction of Bitcoin price following the crash witnessed in 2018. However, the founder of Morgan Creek Capital Mark Yusko in a recent interview said that he sees Bitcoin surging to $400,000 levels in the long-term. A figure that many have found unrealistic and crazy.

Yusko maintains that Bitcoin has the potential to unseat gold as well as remain the leading cryptocurrency. Besides, the recent trends suggest that millennials are preferring Bitcoin and other digital assets as opposed to traditional assets like gold and stocks. Yusko says:

“Bitcoin is much easier to transport. It is much easier to divide. It is tough to break a bar gold into its component pieces. Bitcoin has all these essential qualities that I think are superior to gold.”

Yusko is likely to have done simple mathematics to arrive at this prediction by dividing the total market cap of gold with the circulating supply of Bitcoin. However, Bitcoin will not hit this level in the next two years. It could take it even a decade to do so.

There are a plethora of crypto currencies, including Venezuela’s failed crytpo currency,.  Maduro put the crypt in crypto currency..

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I admit, Bitcoin has done better than Gold over the past month.

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Bitcoin 30 day volatility is subdued over the past year.

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Stranger things have happened.

CoCo Puffs! CoCo Bonds Underperform in European Credit as Volatility Returns (Deutsche Banks Swoons To 7.81)

CoCo Bonds (aka, contingent collateral) bonds were once heralded as the safety net for banks. It was even proposed in a Congressional hearing for US mortgage giants Fannie Mae and Freddie Mac as the ultimate safety net. Unfortunately, CoCo bonds have proven  more risky for investors than previously thought.

(Bloomberg) — European CoCo bondholders are nursing losses of 1.8% this week, as surging volatility amid an intensifying U.S.-China trade war hurts the riskiest form of bank debt.

The losses outstrip declines of 0.2% for euro IG bonds this week and of 0.8% for euro HY bonds, based on Bloomberg Barclays indexes

YTD euro IG is still up 3.79% through May 9, the best performance since 2012, while HY’s 5.59% gain is also the best since 2012

CoCos have gained 8.95% in the best start to a year since 2015; the notes have benefited from the search for yield as dovish central banks compress returns in safer assets

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For example, the Deutsche Bank 6% Perpetual (CoCo) bond is yielding 10.37% and priced at 89.30.

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Of course, Deutsche Bank’s equity has plunged from over 120 to 7.78 today.

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Even CoCo bonds can’t prevent the sinking of the once mighty Deutsche Bank.

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Weakest U.S. 10-year Note Auction in Decade (Foreign Holdings Shrinking Faster Than Fed Balance Sheet Unwind)

Despite repeated warnings about out of control entitlement liabilities, Congress keeps spending money they don’t have. Instead, they run massive deficits and their demand for Treasury borrowing is out of control (unless you believe in fairy tales like Modern Monetary “Theory” where you run staggering deficits and print money until you drop … or default on your debt).

So, Treasury demand for debt growing and foreign interest in US debt is shrinking. In fact, China and Japan’s Treasury holdings are falling faster than the Treasury is unwinding.

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(Bloomberg) — The U.S. Treasury on Wednesday saw the weakest demand for its benchmark 10-year note in a decade, illustrating the diminishing appetite among some investors to accept current yields.

Bids for the $27 billion of notes exceeded the offering by 2.17 times, the lowest since 2009. While there’s no danger that the government of the world’s biggest economy would fail to fund itself, the drop underscores a shift in demand dynamics for Treasuries that could leave them vulnerable to spikes in volatility.

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Foreign investors, led by China and Japan, have accounted for a smaller and smaller share of American government debt outstanding. And the Federal Reserve, for now, continues to trim its holdings. That’s put the onus on domestic U.S. investors, at a time when 10-year yields are little more than three-month ones.

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As The Fed continues its unwind of its balance sheet, the 10-year T-Note yield continues to decline while gold has generally risen.

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VIX Contagion? China’s VIX Soars With S&P500 VIX (Fed Consider Combatting Climate Change With Monetary Policy?)

The growing hostilities between China and the US regarding trade has resulted in VIX contagion .. in both the US and China.

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But this is not the end of the world. VIX has been higher in both China and the US in late 2018.

But today’s VOLATILITY of VIX exploded.

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So, China stocks are suffering along with US stocks. Who will win this battle of wills? Or trade tariffs?

Now with The Fed considering combatting climate change with monetary policy …. everything is … Over, under, sideways, down.        

 

Last Contango In Beijing? VIX Curve Inverts As China Doesn’t Cooperate On Trade

Why are investors optimistic that China will cooperate on trade? While seemingly in their best interest, the “sleeping dragon” has morphed into the “stubborn dragon.”

Volatility markets are signaling elevated risks for equities, flashing a warning sign that portended some of the major market meltdowns in recent memory.

The front-month VIX futures curve traded above the second-month future shortly after 10 a.m. New York Time as the retreat in the S&P 500 Index intensified. The inversion was spurred by a second wave of selling following comments from U.S. Trade Representative Robert Lighthizer late Monday, when he affirmed that President Donald Trump’s vow that the U.S. would hike tariffs on China wasn’t empty. Those comments delivered a blow to traders who hoped the president’s weekend tweets were mere posturing.

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Typically, the VIX futures curve is upward-sloping (in so-called contango) because the outlook for U.S. equities is more uncertain over the long run than the short run. When the curve is downward-sloping (in backwardation), it shows investors are acutely concerned with the near-term risks to U.S. equities.

It also inverted in the fourth quarter days after Federal Reserve Chair Jerome Powell indicated that rates were a “long way” from neutral, remarks which helped accelerate the drubbing in U.S. equities that sent the S&P 500 Index to the edge of a bear market.

China and The Federal Reserve? Two belligerent super powers!