Bloomberg, as often, has the story, which is “great” if they do say so themselves.
All Treasuries are owned by somebody, so if the bigger creditors are selling, then the smaller creditors are buying. Those smaller investors must really love Trump!
Yes, I know, the net effect is measured with the price. * That is actually my point. Here is the price, expressed as yield.
10-year Treasury Yield
The yield is up (price down) a bit since the election. Before the mass marches, that was supposed to be a good thing. But with Presidente Trompe’s net approval rating now at -15, Bloomberg TV is asking, what does Trump have to do to get foreign holdings of Treasuries back up? I guess the answer would be encourage “more currency manipulation” by foreign central banks. But I thought we disliked that?
They have an economist on TV segment who starts off by saying very confidently four misleading things:
- Bond yields are determined by supply and demand.
- “Surely”, the reflation trade will require a capital reallocation away from fixed income.
- To lock the reflation trade and reallocation in, we will need actual fiscal stimulus.
- If the US pays more for credit, then everyone else will have to.
As I see it, the first claim is trivially true, but in context leaves the impression that you can predict Treasury yields by looking at the pattern of capital flows, which you cannot. ** I would forgive the economist for that one, because the lawyer was leading the witness really badly there. It looks like he was just yessing her.
The second one is untrue because all securities are owned by someone.
The third is untrue by virtue of the second being untrue. If there is fiscal stimulus, then there will necessarily be an allocation toward Treasuries, because the deficit will be larger and the stock of debt will be higher than otherwise.
And fourth, bond yields in the major overseas economies will be determined by local conditions, particularly at the short and medium-term conditions. To the extent their long ends get dragged higher, that is probably pro-growth for them. In fairness to the economist, he did not imply otherwise on the latter point.
I don’t think there is much risk that I under-hate Presidente Trompe. But this need to torture asset prices until they confess he is great or — now — not so great, makes no sense to me. What would eliminating constitutional restraint on presidential power be worth to the SPUs? Is your guess +12% or -97%? I figure IG CDX comes in 7 bps if we round up all the muslims? That seems a bizarre way to speak of these things.
Less politically, people really need to get over their fascination with the pattern of capital flows. The ex-ante net flow, almost irrespective of how comprised, is what matters, in my view. The patter of flows is interesting and relevant, but probably quite secondary.
Also, we need to get over looking at this capital flow stuff as generally “good” or “bad.” And not to be too overawed by accounting identities, a little logical consistency here might be nice too. You can’t be against currency manipulation and mourn the loss of foreign holdings of USTs.
I will have more, hopefully less conclusory, stuff on this later. For now, I would rank that Bloomberg take up with misinterpreting China backwards.
* The yield has a small effect on the market value of Treasury securities, which will always be held. And the yield measures the incentive that must be given to investors secure the result.
** Some analysts can apparently get an insight into what yield change might be required by looking at ex-ante supply/demand imbalances, on the grounds that they must close ex-post. But looking at ex-post data flow is not that.