Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.Quantitative easing is the reason people are worried about a U.S. dollar collapse. Stepping up quantitative easing will not solve the problem, it will exacerbate it. All QE can achieve is the lowering of interest rates. On the issue of central banks such as China reducing long-term bond purchases, in my post Crowding Out has arrived, I linked to the Brad Sester post that shows this is exactly the case.
Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.
Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities.
Read the whole article. The Federal Reserve has no idea what it going on, yet they are pursuing the most interventionist policy in their history. Does that inspire confidence? I've mentioned TBT and PST before, two ETFs that deliver the double inverse of the daily change in Treasuries. The above is why the trade carries risk above and beyond their leveraged nature.
Unfortunately, it doesn't appear the Reuters story was wrong on the facts, Bloomberg has a similar story out today:Treasuries, Dollar ‘Only Game in Town’ as China Buys.
Fed officials see several possible explanations for the rise in yields. One is the outlook for the economy is improving and investors are selling government debt used as a hedge against mortgage securities.That confirms what Reuters reported about the Fed believing their asset purchases may not be sufficient. The article also goes on to mention central bank purchases, mentioning China specifically:
Another is the supply of Treasuries for sale exceeds the Fed’s so-called quantitative easing program. After cutting its target interest rate for overnight loans between banks to almost zero, the central bank pledged to buy as much as $300 billion of Treasuries and $1.25 trillion of bonds backed by mortgages to cap borrowing costs.
China increased its holdings by 3.2 percent, the most since November, buying Treasuries with its reserves to control the level of the yuan. The currency, which was pegged at about 8 to the dollar until July 2005, has traded between 6.8 and 6.9 since last June. It closed May 29 at 6.8291 to the dollar.China can cease purchasing Treasuries as soon as they decide to allow the yuan to appreciate. The article goes on to discuss "bond vigilantes", sovereign credit ratings, and Fed policy, and then this:
“To some extent they have to buy Treasuries because they want to support their currency peg,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC. The firm is also a primary dealer.
Indirect bidders, a group that includes foreign central banks, purchased 54.4 percent of the $40 billion in two-year notes sold May 26, the biggest percentage since November 2006, according to the Treasury. They bought 44.2 percent of the $35 billion five-year notes auctioned May 27, compared with an average of 32.4 percent at the previous 10 sales. The scooped up 33 percent of the $26 billion of seven-year notes offered on May 28, matching the average of the other three sales this year.Central banks purchased a larger percentage of bonds on the day rates tumbled. The simplest explanation is that outside of central banks, there isn't much private demand for government paper, the old argument for crowding out, considering the action in mortgage markets. Please see Mish Shedlock's post,"Mortgage Market Locks Up". Mish also covered the Federal Reserve's failure on Wednesday in a post titled: Treasuries Massacred; Yield Curve Steepest On Record
“The idea that we have lost sponsorship at the auctions seems farfetched,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut at RBS Securities Inc., another primary dealer.
Check out his post, which includes the following quote from Fil Zucchi, "As I publicly asked before, if Mr. Fed can't rig the price of an asset by buying it with printed money, why should anyone else buy it?" The chart above indicates few have found an answer to that question.