The U.S. Treasury released its TIC data this afternoon, which confirmed our priors that foreign central banks continue to sell off their Treasury holdings, down $98.4 billion in March and -$135.4 billion over the past 12 months. Surprisingly, Japan was the biggest seller in March and not China, as we speculated. The cost of hedging dollar/yen FX risk has risen and dramatically reduced the return on U.S. Treasuries for yen investors.
The fact that both the foreign central banks and now the Fed are net sellers in aggregate, who have been the largest buyers this century, is not market positive and suspect it is going to a number on Treasury yield volatility over the next few years. No doubt there will be occasional bursts of buying from haven flows, duration jockeys, private foreign investors, reallocators (sellers as stocks fall) and hedge funds using bonds as a proxy for shorting stocks but at a -5.0 percent 10-year real yield will not get many real long-term investors lathered up.
The era of yields detached from fundamentals, as the major buyers, who have not been price sensitive, become net sellers is coming to an end, in our opinion. It’s a big deal, folks.
Recall, Greenspan partially blamed the Fed’s loss of control of the yield curve during its 2004-06 tightening cycle on foreign central bank inflows into the Treasury market, which repressed long-term rates and kept the housing bubble raging even as the Fed raised the Fed Funds rate 425 bps.
Don’t be complacent and blindsided by what is going on in this corner of the world. We suspect this space, it will soon be on the market’s radar.