If I have read this once, I have read this a billion times over the course of the last few days. It seems many are working themselves into a lather and a panic as (and allow me to borrow from their verbage) … China is ‘dumping’ United States bonds. Their conclusion seems to be that this will cause a spike in yields, and everything on the curve past the 20’s will spike to a nillion percent, and all will be lost!
Some have even tried to claim, that if they dumped $400 billion, it would … (and once again, allow me to borrow from their locution) … “kill the Bond market”.
Are you kidding me?
But let us return to the main topic. China is dumping U.S. Bonds?
First of all … do we all remember the last country to “dump” it’s treasuries? Are our memories that short? Don’t we remember … oh … just about 16 months ago, the stories regarding Russia ‘dumping’ it’s U.S. Treasuries? As I, and others said then, it wouldn’t matter one iota. And in the end, it didn’t matter. If Russia did dump treasuries at that time, they only hurt themselves.
Which, given events that have transpired since that time? It would not be that difficult to believe.
400 Billion is perhaps around 0.70% of the entire global market. That’s right. You heard me. Probably less than 1%. All a trader has to do, is profit from the temporary spread between US Treasuries and other non-US bonds, which … we might add, brings the valuation right back into line. It’s a simple spread trade, which in the end, erases the spread from existence.
Second point. If they wanted to (though I doubt they care, with arbitrage waiting to pick up the slack), the Fed could simply buy the bonds right back up. Again, are our memories that short? Just over a year ago, the Fed was buying bonds to the tune of $80 Billion a month. What is a measly $100 billion going to do? The Fed was purchasing that amount in about 5 weeks time.
Heck, between banks, banks in the United States, insurance companies and various trusts, almost three trillion is held in U.S. bonds. What is $100 billion? It’s palty.
If anything, all of this means that China is in even worse shape than we thought. Selling treasuries is a move of desperation.
And some even want to cry that China is using all of this to take over in an attempt to use their own currency as the new world reserve.
And at that, I offer you a hearty … laughing … out … loud.
Do people purporting this nonsense realize that the Chinese Yuan is worth about $0.16 in U.S. currency? You heard me.
Now if people were freaking out about the United States Dollar Index dropping to 72 … you mean to tell me the world is suddenly going to jump on board with a currency whose policy makers are trying to devalue like mad, and is worth $0.16 in U.S. money?
Well, if individuals want to believe that? Excellent. Good for them. Myself? I like to live in a little place I call: Planet Earth.
It’s a beautiful planet. You should check it out some time.
You want to know the really funny thing about this? I wouldn’t mind some exposure to the long end, just for the sake of convexity, and helping out a non-directional strategy I have going on, for the sake of the rest of my portfolio. Naturally I want to leg in at the best price. So if we do see some sort of artificial dump on the long-end through massive treasury selling, all I have to say is:
Thank you China!