Problems in China are looming on top of an already very tenuous and misunderstood
situation in the US Financial Markets. Additionally, Federal Reserve Policy has
made the situation even more combustible!
As a result of a Trump Victory inspired bond market massacre there are now
few places that a yield starved world can presently find better risk-adjusted
yields than in US Treasuries. With China now being forced to sell their FX
Reserves and thereby creating the much needed supply so eagerly craved by
foreign investors, it is also further depleting an already restricted EuroDollar
pool required to buy this supply. There are consequences of this combination
of shifting global parameters.
The Obama administration had been quite successful in orchestrating and limiting
Treasury supply, thereby assisting the Fed in driving yields lower! That is
all potentially about to rapidly change. In fact, the match may have already
been lit!
An Extremely Tenuous Situation
Though US Bond Yields are likely to head higher later in the year as Trumponomics
unfolds, there are some serious and unexpected imbalances to be corrected
in the near term.
The imbalances have all the ingredients for a short squeeze which triggers
a classic "rotation".
Presently Being Made Much Worse By Fed Policy!
In A NIRP World (~$12t)
The Risk-Adjusted, Dollar Denominated Us Treasury Has Suddenly Become The
Holy Grail!
Meanwhile Money Is Fleeing China Anyway It Can - Despite Futile Capital
Control Attempts.
China Is Trapped and is Now Being Forced To Sell Us Fx Reserves
Reserve requirements are lowered alongside falling FX reserves. These are
coordinated in order to mitigate negative effects from changes in the domestic
money supply.
China's Mercantile, Export Lead Strategy May Have No Other Way Out in The Near
Term!
You may want to read a more technical analysis we recently published entitled: A
Broken Bond Bounce Beckons!
