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Minyan Mailbag - Treasuries



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Dear John,

We've all been hearing about certain central banks diversifying away from the dollar assets -- is that the major reason why treasuries have been falling? The bond market has only recently been correlating with the falling dollar, but I was just curious if the selling of dollars immediately begets sales in treasuries (or is it vice versa?) For example, to take the opposite angle, if the Bank of Japan intervenes and buys dollars, do they immediately turn around and buy treasuries, or can there be a delayed reaction? Thanks.

Minyan Norm


Foreign countries, especially Asian countries, are invested mostly in the short end, five and ten year treasuries. When they reduce foreign holdings of bonds we see pressure on prices in the short end more than the long end. This is what we have been seeing: a flattening of the yield curve as prices in the short end go down more than in the long end. So the market is telling us that foreign countries on the margin are trying to reduce their exposure to the dollar. This goes in fits and starts. Just last night the ECB and Japan announced a deal to coordinate intervention to stem the fall in the dollar against their currencies. It remains a mystery game with much jawboning and secret actions.

Up to this point the falling dollar has not hurt rates enough (rising rates) to hurt stock prices, although I am somewhat surprised at this. Brian points out that there is still a rush into corporate bonds (either outright or synthetically through CDS swaps); he and I wrote about this last week where insurance companies and pension funds starving for yield have increased their risk tolerance by assuming this credit risk and hedge funds specializing in credit have participated as well. Brian is pointing out this morning that this crush in credit is continuing and may reflect foreign countries possibly selling treasuries but buying corporate bonds with their dollar reserves.

Lastly, there can be a lag in dollar selling versus treasury selling by a few days because the treasuries don't settle the same day. Or they could even pre-sell the dollars.

I remain agnostic about stocks (they can do anything) until I see the falling dollar affect rates. On the margin they have, so I am watching diligently. Especially stay attuned to the dollar yen since the Japanese are by far most accommodative to the U.S. A dollar yen breaking 100 would begin to get very painful for the Japanese and at that point they may begin to be less aggressive in defense of the dollar.

Prof. Succo

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