Brad Setser Profile picture
Oct 4 6 tweets 2 min read Twitter logo Read on Twitter
I think PGIM's Daleep Singh got this right --the structural issue in the Treasury market is the reduction in "predictable sources of demand" amid "record amounts of government debt issuance." It isn't so much outright sales, as the absence of price insensitive buyers.

The Fed isn't technically selling, but it also isn't reinvesting maturing bonds back into the market. QT and all.

China probably isn't selling either, but the US data equally doesn't show purchases (and it is consistent with a bit of bond roll off in 23 tho not 22).

Japanese investors aren't selling like they did at times last year, but the renewed bid this year is modest and perhaps more price sensitive in the past.

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And all this probably would be more pronounced if there was scope to disaggregate data by maturity buckets. With an inverted yield curve, there isn't predictable demand for the 10y from Japanese banks looking borrowing 3m money and getting a hedged return v JGBS

Similarly, with an inverted curve Central Bank Reserve managers can just sit on a portfolio of 2y notes and earn 5% (way more in the past). Low rates on the front end of the note curve no longer push them into 5y and out notes ...

So I think there is something to the idea of looking at issuance, particularly for maturities of over 5ys, relative to the remaining "predictable sources of demand"

Quote from today's @NickTimiraos WSJ story


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More from @Brad_Setser

Oct 4
Hold the presses. The odds are that China isn't actually selling dollar bonds. Or even moving its reserves out of the dollar.

A new blog on how to interpret the US TIC data…
A couple of notes on the blog.

It goes through, in great detail, how to find China's Agency holdings and how to adjust the reported TIC data (in the major foreign holdings table) for China's use of non-US custodians

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I have realized that many sophisticated market players haven't spent as much time with the data as I have over the years, and think I have learned a trick or two. Knowing how to find China's dollar holdings during the 2012-16 period actually helps a lot now.

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Read 15 tweets
Oct 3
Bigger question is whether Japanese banks and others who went out the yield curve into ultralong JGBs are ready.

BoJ financial system reports have consistently reported on how the search for yield led institution into the ultralongs (and also into hedged foreign bond portfolios)

The BoP data in the IMF's data set lags but the flow out of Japan is way more complex than would be suggested by the standard simple analysis (shape of the US curve matters, yield differences matter). JP foreign bond sales tho have actually moderated in 23

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Read 6 tweets
Oct 3
Wonder if China will eventually be forced to create a "troubled property developer relief program" -- a comprehensive recapitalization of the property developers akin to the US TARP.

(Obviously I am trying to be a bit provocative)

Chinese policy makers are obviously trying to avoid a national program (at least one that goes beyond the PBOC's lending facility), let alone a comprehensive plan that uses central government funds to clear away a systemic problem

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China's leaders tho have " repeatedly leaned on housing to goose growth" and also precipitated the current downturn when top leaders worried "the [housing] boom was drawing credit away from economic sectors he considers crucial to China’s future"

Read 15 tweets
Oct 2
The yen and the yuan are the two most important Asian currencies, and both are right at multiyear lows.

But there is one difference from last summer/ fall -- the rest of Asia hasn't faced the same kind of pressure.

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This was even more apparent in the data for q2 -- Asia ex China/ HK was adding rather substantially to its reserves (rebuilding funds spent in q2 and q3 of last year)

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With the rebound in oil that may be changing -- the currencies of the rest of Asia came under a bit more pressure in September (while China intervened through the backdoor to hold the CNY steady)

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Read 7 tweets
Oct 2
I would go further than Mark.

This article is far too complacent.

We are in an unusual world where -- thanks to the lagged impact of the pandemic -- the dollar's strength hasn't raised import volumes or reduced import prices.

It won't last
A 10% rise in the dollar usually reduces non-oil import prices by 2-3% (not a ton, true) and reduces net exports (the trade balance) by at least a percentage point. Neither has happened. In fact , import prices are up not down since the dollar's 2021 rise Image
And consumer goods imports are down 15% y/y in q2 even as the USD rose?

Permanent breakdown in relationships that have stood the test of time (standard models worked in 15/16)? Or an unwinding of the effects of a once in a century pandemic + associated disruptions? Image
Read 4 tweets
Sep 27
Find it amusing that Bloomberg never mentions outright intervention as one of the tools China could use to influence the exchange rate ....

The Bloomberg article Pettis quotes (from yesterday) is very good -- this is a great chart showing the limited room left inside the band.

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But it seems strange to me that Bloomberg doesn't mention the most obvious option available to China to bring spot closer to the fix -- namely to use the largest reserve stockpile the world has ever known

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Read 9 tweets

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