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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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.

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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Gator Jaws, Triple Top And VIX Net Shorts (Something Wicked This Way Comes)

Something Wicked This Way Comes!  Or at least MAY be coming.

Let’s start with the all-time record net short VIX positions by speculators.

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Not a good sign at all.

Then we have the S&P500 Triple Top (blue line) and Gator Jaws (S&P500 Index relative to the Citi Economic Surprise Index for the USA).

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Then we have another gator jaw: S&P500 index relative to S&p500 adjusted EPS.

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While VIX is begin shorted, the 10-year Treasury Note is really being net shorted. Gold, on the other, hand is net long.

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My former MBA student at University of Chicago, Kevin Smith of Crescat Capital in Denver, has this nice interview on trading the end of a cycle.

In other words, something wicked this way comes. Maybe.

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Initial Jobless Claims Lowest Since 1969 As Wage Growth Hits 3.5% YoY (Phillips Curve Resurfaces!!)

The initial jobless claims for March beat expectations and is at the lowest level since 1969.  Coupled with wage growth hitting 3.5% YoY (the highest since 2010), it appears that the Phillips Curve has resurfaced.

The Phillips Curve is the relationship between the unemployment rate and wage growth.

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The Phillips Curve has been MIA (missing in action) for a long time, but has resurfaced in the form of initial jobless claims and wage growth. While Core Inflation YoY is a tepid 1.79%, wage growth is climbing to almost 3.5% YoY.

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If you believe the Taylor Rule (Mankiw specification), The Fed should continue to raise its target rate.

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Wage growth at around 2x core inflation? Over, under, sideways, down.

S&P 500 e-mini Futures On The Rise Again As China Signals Growth (UST 10Y-3M Curve Turns Positive Again!)

China signalled positive manufacturing growth and the market react positvely.
(Bloomberg) — Stocks strengthened worldwide as strong manufacturing data out of the world’s second largest economy (China) helped ease investor worries about a slowdown in global growth. Treasuries extended losses after as a gauge of U.S. factories topped estimates in March.
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The S&P 500, Dow and Nasdaq were all in the green. Shares of Lyft dropped below its IPO price as analysts noted there is limited visibility into the company’s path to growth and profitability. The Stoxx Europe 600 Index climbed on the heels of its best quarter in four years after key China manufacturing PMIs for March beat the highest estimate in Bloomberg surveys of economists. That’s despite manufacturing data for Europe coming in at the lowest since 2013, which briefly caused the euro to pare some of its gains.
E-mini S&P 500 futures are on the rise … again!
 

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And the 10 year – 3 month yield curve turned positive!

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Remain Calm! VIX-MOVE Spread Separates As Fed Rate Cut Predicted

Welcome to the topsy-turvy world of financial markets!

The S&P 500 Cboe Volatility (Equity) index versus the Merrill Lynch 1-month Treasury bill index (MOVE) show a further separation.

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This comes as the WIRP Estimated Number of Moves Priced in for the US (Futures Model) is indicating one rate cut coming up (although Trump’s economist Larry Kudlow wants 50 points in cuts as does Trump’s nominee for The Federal Reserve Board of Governors, Stephen Moore.

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Despite Kudlow and Moore touting 50 basis point cuts (and a slowing advanced retail spending report for February) …

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Remain calm .. all is well!

 

Trouble In Turkey! Lending And Swap Rates Soar As Turkey Continues Monetary Repression

This week, Turkey further roiled markets by preventing foreign banks from accessing the liras they need to close out their swap positions. That’s made it almost impossible for bankers to short the lira or exit carry trades, and forced the overnight lira rate up to about 1,000 percent from 23 percent.

And the USDTRY overnight forward implied yield has risen to 861.

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The volatility surface for the USDTRY is showing an unusual shape.

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Turkey’s USD Sr Credit Default has blown out to 473 at 10 years while their 2-year Lira swap rate is 29.

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From Zero Hedge: Just days after Turkish president Erdogan vowed to crackdown on currency speculators and launched a probe against JPMorgan for its Friday reco to short the country’s currency to 5.90 vs the dollar, on Tuesday Turkish authorities took their vendetta against short sellers to never before seen levels, when taking a page of the Chinese currency manipulation playbook, they made it virtually impossible for foreign investors to short the lira.

Turkey will not be mating with US banks like JP Morgan Chase in the near future.

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