If you are not watching this space, you won’t know what hits you when it hits you. 

Central banks, both the Fed and foreign, have morphed from the largest buyers of Treasury notes and bonds over the past two decades into the largest net sellers.

Japan and China Biggest Monthly Treasury Dump On Record

Japan and China, both private investors and central banks, sold $118 billion of Treasury notes and bonds in September, their largest combined monthly dump on record, which confirms our suspicions from a September post,

We also have no doubt Japan’s holdings are down from the latest observation in July. – GMM,  Sep 29th

As of the end of September, the Japanese have sold $114 billion in coupon Treasuries since July, 9.2 percent of their holdings, and $208 billion from Japan’s peak holdings of $1.33 trillion in November 2021, down 15.7 percent.  

The above goes a long way to explaining the below. 

“In recent months, however, liquidity in the Treasury market has deteriorated further. This recent development is more concerning, as it seems as if market functioning has become a bigger source of risk, rather than just reflecting the uncertain fundamental environment.”

For most analysts, the liquidity problems in the Treasury market are not just about rapidly changing prices, they are also a reflection of a dearth of buyers, or an inability or unwillingness of the buyers in the market to mop up all the supply. The fact the Treasury department has begun discussing the prospect of buying back some of the most illiquid Treasury bonds, says HSBC’s Major, is an implicit acknowledgment that faltering demand has begun to cause problems. – FT

Our The Great Reset: The Bond Yield-Dollar Feedback Loop post provides a fairly reasonable framework to explain the dollar bond yield dynamic based on global capital flows.  It’s an easy read and worth your time. 

The Path to High (per) Inflation? 

If the Fed is forced to step in and finance the U.S. Treasury as they did en masse with the COVID rescue packages or help in the rollover of Treasury refinancings, the economy will be set on a path of high inflation for many years to come.