Scotiabank Asks "Are Treasuries The Only Adult In The Room?"

Tyler Durden's picture

Via Scotiabank's Guy Haselmann,

Disparaged Treasuries are the Only Adult in the Room

Treasuries continue to do nothing wrong.  My bullish views on bonds over the past several months have been met with stern opposition; however, several are now beginning to question their defiance.  With such in mind, it is worth reviewing once again some possible explanations behind the bid.  There are many reasons to expect their strong performance to continue (particularly over the next week).  The bullets below are in no particular order.

The move below 2.5% in the 10-year has been accompanied with talk of convexity needs by mortgage servicers.  Many expect a larger trigger below 2.3%, but the recent down in coupon trade is evidence of existing duration needs.  However, it is only fair to point out that convexity flows are not what they used to be due to the rise in MBS holdings by the Fed, a decline in REIT holdings, and high premium MBS being mostly owned by the GSEs who now make fewer hedging adjustments than in the past.

A few shorter-term factors include tomorrow’s large month-end index extension of 0.12 years of the US Treasury Barclays Index and the fact that bond funds have registered their 11th consecutive week of inflows.

Looming over the market in the near-term is also next week’s ECB meeting where aggressive action is being anticipated due to well-telegraphed hints by Draghi.  His hints have lowered yields and spreads across all European fixed income markets.   Treasury (nominal) yields which have looked attractive relative to the rest of the world have been dragged even higher recently in sympathy with the move in European markets.

  • For example, the US 10yr yield is 70 basis points higher than the French 10yr, while the US5yr is only 6 basis points lower in yield than the Spanish 5yr.   The Japanese 5yr and 10yr notes yields are 0.17% and 0.56%, respectively, compared to 1.49% and 2.42% (note: all comparisons are nominal yields).

I’ve also written about what Pimco calls the “New Neutral”.  Basically, if the neutral nominal fed funds rate is closer to 2%, rather 4%, than Treasuries remain inexpensive.

It is possible that low global yields are a sign that expectations of future growth and inflation are falling Several weeks ago, I wrote that maybe it was “time to reverse the causality”, where, “rather than assuming that stronger growth will bring higher yields, maybe investors should start asking whether exceptionally low global bond yields are saying something about the long-run state of the globalized economy and/or inflationary expectations (deflation)”.

  • Many new headwinds have arisen in the form of Japan’s consumption tax, China’s attempts to reign-in its massive credit bubble, foreign central bank rate hikes, poor developed world demographics, globalization, Russian sanctions, and higher food and energy prices.  There is also Fed policy where:  QE= risk on.  Ending QE = risk off.

There are several other factors that are unquantifiable, yet whose aspects are compelling enough to deter Treasury shorts and motivate others to cover underweights.

  • The foremost factor is the markets persistent focus on a note that I wrote on March 28th about the changing incentives to corporate DB pension plans. I stated that rule changes will create strong demand for long end Treasuries causing them to trade with commodity like characteristics.  I stated that the bottom line was, “The rule changes to the PBGC means that going forward, private DB plan managers will be driven less by their role as a fiduciary trying to ‘maximize return per unity of risk’, but rather by decisions based more by funding status and regulatory incentives that encourage LDI”.
  • Chinese buying of US Treasuries is another compelling, yet unquantifiable, argument and possible source of demand.  My colleague John Zawada first began discussing this topic last week with a similar story that printed in yesterday’s Financial Times.  According to the Treasury Department, Chinese official holding fell by about $40 billion since last November, but ‘Belgium’ holdings increased by $200 billion.  It is thought that a big foreign investor (China?) has merely switched its custody service to Euroclear which is based in Brussels. The intentional devaluation of the Renminbi this year has resulted in a larger current account, so it makes sense that the ‘extra’ dollars would flow into Treasuries.
  • The FT reported (via Wrightson ICAP analysis) that the drop in official Chinese holdings as a percentage of FX reserves fell from 37% to 32% since November.  However, if you associate the increase in the ‘Belgium’ official holdings to China, then the percentage remains the same at 37%.

“If you’re always trying to be normal, you will never know how amazing you can be” – Maya Angelou

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Grande Tetons's picture

Scotiabank's Guy Haselmann....

has a date with a nailgun. 


markmotive's picture

Well, the adults certainly are not on Wall Street. That's for f@cking sure.

Cheaters on Wall Street: What Drives Bad Behavior?

InjectTheVenom's picture

all i need to know is how Gartman feels ..... then i know how to be positioned 

NoDebt's picture

Just had dinner with him.  He feels great.  New haircut, new suit (hand-tailored Italian).  Still richer than us.  Ego still expanding exponentially.  And whatever doubts he has about his true worth he's drowning in ever-increasing amounts of cocaine and hookers.  Fabulous.  Simply fabulous.

fonzannoon's picture

Many of the clients that bought annuities with "guaranteed minimum income" riders are getting offers from a very large global insurer to buy them out of their policies for thousands of dollars above their current account values and forgive any closeout charges. I mentioned this to my Dad (retired but used to be in the biz for a while) and he said "you gotta take the offers". He knows as well as I do that the next step after the offers is the insurance companies default on the promises that the clients paid a ton in fees for. As if to illustrate his point he read me a letter he got from a pension from an old job that was notifying him that low interest rates had caused the plan to deteriorate and to plan for the day not so long from now when the pension will be terminated. 

This leads me to believe that Yellen will fraud out a monster NFP next week and immediately end QE. They are crowding out other buyers and the result is this implosion in rates. She is going to try to froce yields back up and CNBC will hit new levels of stupidity selling growth. I don't know that it will help. We may be in the final innings of our nirp spiral down. I'd expect the stock market to go parabolic if we are and then blow up like something we have never seen. Enjoy the ride.

TimmyM's picture

Fonz-I enjoy your posts but you are going full retard on this one.
Timmah knows!

fonzannoon's picture

I don't deny that. Which part? The part about the fed ending QE early? I actually stick with that. I think the people here who underestimate the demand for UST's right now are the complete retards. They are probably the same peple continually shorting the market and getting their asses handed to them. 

The part about how low rates affect pension funds etc? I think that is undeniable. So I won't bother. I appreciate you speakiing up. So tell me, which part?

The part about contracts being bought out?

"For a limited time, the insurer will boost a client's account value if the client agrees to terminate the guaranteed-minimum-income-benefit rider, along with other optional riders. Those riders include death and earnings enhancement benefits."

fonzannoon's picture

Come on out and play Timmy. I'm waiting.


prains's picture



is a 4 year 31 week troll, signed up by the .gov goons to show up once a year under a plethora of idents to spread foulness and disinfo.....FUCK YU Timmayballsacheforyourtongue

disabledvet's picture

we dropped the t(y)ranny about (200_) eight(y) miles back but we didn't notice until we rolled into Scranton.

"Man does that engine sure still revs nice tho. 6 (years) thousand RPM!" (brakes were pretty much non-existent too.)

Wait to see what happens when we take the high compression Japanese shit all out dude!

deflator's picture

 Yes the bond bubble will have a parabolic, hockey stick blowoff top. Bonds are cheap right now bitchez!

 Bonds are the new houses, they never go down in price.

buzzsaw99's picture

only foreign governments or central banks could be the belgian whale(s). were it anyone else (other than the fed) they would roil other markets. clandestine fx operations or politics must be driving the move otherwise they would buy direct. (if it were the fed they would shout it from the roof tops to get the maximum jawbone effect.)

DavidPierre's picture

Fuck Guy Haselmann and all his bullshit.

Read what Jim Willie has to say ...

Clearly, the Belgium Bulge indicates a late stage of collapse. The game is fast changing, using big hidden channels in the monetary war.

buzzsaw99's picture

I used to read Jim Willie religiously. He has been around a long time. Love the shout out: The intrepid Zero Hedge journal has been covering the story extensively, as always on the leading edge...

buzzsaw99's picture

btw, after reading further willie is probably wrong about the gold angle. the chinese do not honor underwater positions and they don't throw good money after bad.

Racer's picture

China secretly buying US treasuries? I think they have more than enough to grab the US by the short and curlies!

buzzsaw99's picture

"If you owe china $100 that's your problem. If you owe china $2 trillion, that's china's probrem."

Kreditanstalt's picture

What happens if all these super-smart and happy trading guys make so much lovely money (from someone? who?), hand over fist, only to find that price inflation is finally going to eat alive their paper dollar returns from any kind of paper investment...?  There'll be a massive and unseemly RUSH for the exits at some point...

I bet we'll soon find commodities springing to life.

HUGE_Gamma's picture

which case for bonds (bullish/bearish) is bearish for equties?.. ohh right BOTH

ejmoosa's picture

Yes, let's buy as many Treasuries as we can, because the Federal Government has done such an outstanding job with the 17 trillion they have still owe so  far.

Who would you rather be invested in, after all?  A government that produces nothing but regulations and roadblocks, or the companies that must navigate all those regulations and road blocks?



deflator's picture

 I would think that the one that has possession of the printing press for the WRC has the upper hand here for now. As far as the companies and the inference of timing that, "for now" implies--shrug--when they are finished with them they are finished with them. When a job is done it is done.

 Lazy cynical government produced the regulations and roadblocks because the ever consolidating company(s) pushed them for it to squash competitors and potential competitors. Eventually government will be so large that it will crowd out even its own crony companies.

sandhillexit's picture

You may be overthinking this. Here's a theory: EUR flirts with 1.40 and deflation looms.  Draghi needs to lower the currency.  He doesn't want to stir things up in the banking sector by tweeking rates, because DB is a bit punch-drunk.  He tries "verbal intervention" and the market scoffs.  So he prints EUR and sells for USD, parks the USD in USTr.  The EUR printed at 1.36 today.  He's made about $8 bln, not a bad year's work.  Interesting that he doesn't want to take title at the NYFed.  A bit of a diss of Mr.Dud but "ca va."

BullyBearish's picture

I felt that by ending QE the FED was in effect capitulating to inflation and the effects of NIRP.  Had nothing to do with the recovery, however they had to have something to point to and what's easier than having the BS/BLS print out some joyful numbers to prove the point?  I would dearly LOVE to see Yellen the Felon put the final gellin on QE and signal that normalization is right around the corner.  But I can only dream.