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What Declining Global Reserves Mean For Bond Yields: Goldman's Take
Don’t look now, but suddenly, the dynamic we began warning about last November is the talk of the financial universe and it only took one earth-shattering currency devaluation and the liquidation of a few hundred billion in US paper in the space of just two weeks to wake everyone up.
We have, as Deutsche Bank put it on Tuesday, reached the end of the “Great Accumulation” as slumping Chinese growth, plunging crude, and an imminent Fed hike have put enormous pressure on emerging economies’ accumulated stash of FX reserves and that means that buyers of USD assets are becoming sellers at the expense of global liquidity and the perpetual bid for some core paper.
Of course this didn’t just happen in the last two weeks as (almost) everyone would have you believe. This began quite some time ago and the death of the petrodollar was in many ways the starting pistol for what Deutsche Bank has correctly identified as an epochal shift.
Well, for anyone who’s lost sleep wondering what Goldman thinks, you can relax, because the “smartest” guys in the room - whose former employee at the ECB will be watched closely this week for any possible response to the China turmoil - is out with their take, excerpts from which you can find below (note the multiple nods to the fact that this began with the dying petrodollar).
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From Goldman
Falling FX Reserves and Rising Bond Yields: Some Macro Considerations
There is increasing focus among investors on the decline in FX reserves across Emerging Markets, and in China in particular, and the negative impact this could have on government bonds in general, and more specifically on US Treasuries.
We view such dynamics as part of an ongoing structural shift in international trade and capital flows which will interact with the increase in bond yields in the advanced economies embedded in our baseline forecasts. On balance, the decline in foreign official sector reserves represents a headwind for government bonds over the medium term.
When assessing the near-term impact on fixed income resulting from these forces, however, we would advise against following a narrow flow-of-funds approach, as the correlation between changes in official sector flows (which are available only with a lag) and changes in yields is unstable, and shifts in macro expectations ultimately tend to win the day.
In big picture terms, the rise in foreign FX reserves held by non-G-7 countries that started around 2003-04 (at around US$1trn) appears to have ended for good – particularly if our ‘new oil order’ template holds, keeping crude oil prices around current levels (at least for now, official FX reserves in the advanced economies are not being diversified into CNY to a materially relevant degree). Here are some key facts:
- Official sector FX reserves held by a broad set of countries outside the G-7 peaked about a year ago. Data compiled by the IMF suggests that, in Dollar terms and excluding gold, FX reserves fell from US$7.7trn in June 2014 to US$7.1trn in June 2015 – the last data point available. The reduction has been led by China (which accounts for just over half of the total amount of FX reserves quoted here and has seen a fall of US$300bn over this period) followed by the group of oil-exporters such as Russia (-US$120bn), Saudi Arabia (-US$67bn) and Malaysia (-US$26bn).
- The decline in FX reserves reflects primarily lower accumulation of hard currency from the current account channel, related to the fall in commodity prices and shifts in relative competitiveness across regions. The depletion of FX reserves stemming from the capital account side in countries that have resisted exchange rate depreciation is a more recent phenomenon. China is among this latter set of countries, and the scale of the outflows has attracted much attention. In the first 6 months of the year, China has lost on average US$10bn reserves per month, in spite of an average monthly US$25bn addition in reserves from the current account side. In July-August, concomittant with the unexpected shift in the FX management policy, the decline in FX reserves could be well north of US$100bn, although there is considerable uncertainty around these numbers.
- Although there has been a large currency diversification of FX reserve pools, especially since the Financial Crisis, the lion's share of official reserve assets is held in US Dollars. In the case of China, we estimate that around two-thirds of the PBoC’s reported US$3.5trn reserves are held in Dollar-denominated cash and fixed income (mostly Treasury and Agency securities, with an average duration of around 5-6 years). This split between Dollar holdings and other currencies is representative for other central banks across Asia and the Middle East, although duration is in the aggregate lower. Central bank reserves held in EUR are largely invested in ‘core markets’ (e.g., Germany and France). So it is broadly correct to assume that a decline in FX reserves will affect proportionally more Dollar-denominated fixed income.
- To the extent that the FX reserve decline is the counterpart to capital outflows, a relevant question in this context is where these private sector funds are heading. If the answer is back into Dollar fixed income securities, the impact on the pricing of the latter would be at least partly neutralized. If it is hard to say what assets central banks are selling to accommodate the demand for hard currency, it is even harder to tell where the Dollars now held in private hands are being invested. It seems reasonable to assume that, in the short term, central banks would first sell cash-proxies, and new private sector holders of Dollars park them in fixed income instruments. Over time, however, the risk preference of the private sector is likely to be higher than that of the central banks, and the privately held Dollars would find their way into riskier assets (real estate and securities, held directly or through intermediaries), resulting in a gradual transformation of EM claims against advanced economies (e.g., the PBoC holds fewer Treasuries, the Chinese private sector more foreign risky assets).
Bonds’ macro underpinnings may shift further: The fall in FX reserves in China and in commodity exporting economies has occurred together with a shift in expectations on global growth and commodity prices. Since the start of this year, our colleagues have downgraded 2017-2018 US real growth by a cumulative 75bp to just over 2%, and the corresponding Chinese numbers have also come down by 50bp to just below 6%. At the same time, primarily reflecting supply-side considerations, our medium-term commodity projections have fallen over the past quarters. These shifts are not inconsequential for the fixed income market outlook. We have argued that, among asset classes, government bonds are already discounting a very depressed trajectory for real forward rates, and offer little risk premium. This, rather than lower central bank buying, is why we forecast poor returns. But a bigger slowdown in China, or an even larger fall in oil prices – of which larger capital outflows and FX reserve depletion could be a symptom – would likely be associated with deeper revisions in prospective nominal growth in the developed world. This would lower our sights for bond yields, not lift them.
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Did Goldman just say the party's over? Say it ain't so Joe, say it ain't so.
Hand it back to God......smart thinking.
FUCKING BULLSHIT IS MOAR LIKE IT!
Goldscam Sucks knows damn well that lower liquidity means much higher yields are demanded.
What a bunch of fucking scum bags who deserve to go down in flames with the joke of a """market""" they made
Goldman laying the public groundwork for the next installment of the QEn welfare programe.
The private groundwork has never stopped.
https://www.youtube.com/watch?v=4YEZFtu5OMU
go to 15:30 and listen for at least two or three minutes..
Thanks, always good to go back to basics like that one that outline everything and how it is in their BYLAWS to manipulate the gold price.
This is common knowledge to financial junkies like me and you. Who can forget J.P.Morgans blatant market rigging of Silver prices and the work of the "London Whale"? The high frequency trading, the flash crashes at the same time every day for weeks on end. How many times were trade orders never fulfilled? Where was the regulatory body the SEC? How big is the paper Gold and paper Silver market? Today it is 138 paper claims for every ounce of physical gold. Anybody holding Gold ETF's, must have an IQ of 60. Talk about wealth being wiped out. Lol
Fortunately silver is 30x more abundant that Gold thanks to mother nature, but when the shit hits the fan, the great unwashed and the plebs will dive into Silver, who make up remaining 99% like myself. It's the scramble for the Silver that has me really interested, as Gold is already out of reach for the 99% and that's at today’s artificially manipulated low prices. Silver is the last life boat and until we hit the iceberg, the majority is not interested in life-boats.
That's good advice for investing, but like everything in investing, timing is everything. I think a distinction has to be made between investing and surviving, and obviously, surviving is more important.
You are imagining the death of the financial system and ignoring the high probability that it will be followed by the collapse of the system itself. You have 319 million people here in the United States with about two weeks of food in their house. If the big one goes down, Zero Inventory and Just In Time Delivery mean the shelves will be bare in 2-3 days. Silver WILL be worth something, but it's hardly the last lifeboat. Guns, ammo, food, and large families and large groups that can defend themselves will be the only life boat. You flash some silver around in that environment, and you're going to have a dozen guys visit your home to take what's yours. This isn't some apocalyptic vison of the future, it's happened in other collapsing societies before like Kosovo.
Not being critical, I just believe it can't be said enough. The same people who couldn't handle caring for the financial system are making decisions about keeping you fed and caring for your safety. Inasmuch as they've showed complete disregard for the safety of the financial system, I can't help but feel our meal ticket and our safety are about to become an illusion too.
Have to agree RTTB. Anybody should know that increasing supply of already issued debt will tend to push prices lower and interest rates higher. Since world apatite for US debt is down that forces the Fed and their proxies to eat the redemptions with....(drum roll please) new money.
Seriously, why does anyone give a flying fuck what Goldman Sachs says? While I'm on the subject of shills and clear bullshit... have you taken a look around the edges of Zero Hedge? Mainstream advertising on a voice of the revolution website... I dunno - makes me chuckle.
...like Cramer's picks showing up at the top of the page
what makes you think ZH is a "revolution website", exactly? however, if this would be true, then "know your enemy" would still apply
agree with headbanger, btw. take away this sea of liquidity, and higher bond yields would be demanded... according to orthodox wisdom we left long ago for those new brave world unknown shores
What advertising? All I see is clean white space on the edges, and with a little effort, you can too.
Still, I do miss the boobalicous Chinese and Russian babes. Almost tempted to turn off the adblock at times just to sneak a peek....almost.
Someone's getting fired.
But, but, but...I just heard this morning on NPR that the US economy is doing well and auto sales are particularly good! No explanation of why China and EMs are slowing, like the US has nothing to do with it.
Also on NPR a little bit today of preparing the sheeple to blame others for the end of US $ reserve status. Mention of a few more votes needed in Congress to accept the Iran deal or the $ could be in trouble. This is the second time they have featured this story but this time more expanded since Kerry first uttered those words in public. Expect to hear more of this and in depth explanations as to what it would mean if the petro dollar goes the way of the dodo. Of course you will not hear any analysis of US and London responsibility in the rise and demise of the $.
Perhaps the Jesuit Pope will explain why it is so important to go to a cashless society with one world central control. We have to do it for the children. Please note the Pope will be wearing his white yarmulke. I wonder why he alternates hat styles? The fish hat of Dogon and the Jewish yarmulke.
Goldman wondering what China is going with their cashed-in treasuries? How about gold? Clearly no mention of this.
Goldman always talk their book. Rising bond yields could crush the Fed's portfolio of Treasuries:
Economists predict that the US Federal Reserve could lose half a trillion dollars in just three years thanks to policies enacted by the central bank under Chairman Ben Bernanke.
The group says they concluded as much after using stress-test scenarios designed by the central bank to examine how the value of securities held in the Fed’s portfolio at the end of 2012 will stand up during the next few years. In a situation involving economic contraction and rising inflation, MSCI expects the Fed’s holdings to drop drastically by more than half of a trillion dollars.
http://www.rt.com/usa/federal-reserve-trillion-loss-565/
Money vaporized, To quote an old Popeye cartoon;
"I come from the nowhere, I go the no place"
We have argued that, among asset classes, government bonds are already discounting a very depressed trajectory for real forward rates, and offer little risk premium. This, rather than lower central bank buying, is why we forecast poor returns...
well that just makes them entirely full of shit then
trav7777-------The future cannot repay todays DEBTS--------
fu Golman
Thumbnail picture of a Vampire Squid, Nice touch Tylers
I wish there was a way to access just the thumbnail to see it in a larger size... My eyes are getting too bad.
Just google 'Vampire Squid' and click on images.
(learned about them on Octonauts with my granddaughter https://www.youtube.com/watch?v=cZH_Iq6_e7A )
Here's the thumbnail
http://www.seasky.org/deep-sea/vampire-squid.html
The Fed will buy bonds when no-one else will...or maybe she won't. If prices drop appreciably, putting sell pressure on foreign holders of Treasuries, especially if other sources of income are drying up (sell bitches, sell!), that fucks with the Fed's ability to ease.
Rate hikes are inevitable. Bond prices are an anvil, held above the Fed's head on wobbly arms.
If the Fed's portfolio is at risk, it means the dollar is at risk. Or did everyone forget that the Fed took all of the toxic assets from 2007, and put them on their portfolio? The Fed's balance sheet had $800B in treasuries before 2008, but after QE1, 2, & 3 it is over $4.3T. The Fed is now leveraged 77 to 1 (http://dealbook.nytimes.com/2014/06/27/feds-balance-sheet-punctuated-by-...). Or they were before they had to gobble up all of the losses listed above, so tack on another US$300bn. That is twice as high as Lehman and AIG ever were. They have done a good job of hiding inflation so far, but with the collapse of our reserve status...why isn't this word being brought up: HYPERINFLATION. Get your wheelbarrows ready, you're going to need to fill them with cash just to buy some bread once they use QE4, 5, & 6 to attempt to gobble up all of this dumping.
When pandemic market rigging, market manipulation, fraud, corruption, and sufficient regulatory capture is part of the business model. This is what you get. The reality is 95% of the posters on ZH, including me, are merely hostages to fortune, for we have no way of predicting events as everything is centrally controlled by those who own the printing presses and their subsidiaries who control and rig the market.
Economic theory no longer exists. The entire market is rigged. Those of us who have invested in Gold and Silver can only hedge against uncertainty, in the hope that historically when the shit hits the fan Gold and Silver rises in value and is accepted as money. Basic maths should tell anybody willing to be honest and objective, the debt can never be repaid. Yet every western/first world nation has their heads buried in the sand. Who the fuck came up with the idea of borrowing now, to leave the debt for future generations to repay? Upon reflection this is perverse position to take. Is the party over? We don't need Goldman’s or Deutsche bank to tell us that. The party has been over since 2006 and not 2008 when it was noticeable that some guests had already left.
What we are waiting for is for the last few guests to leave. You know the type. The people who know the party is over, but are still sitting around, who you offer something eat, because you are too polite to make a sandwich for yourself and not ask out of kindness if they would want some as well. The same type you will offer a bottle, or case or two for the road, just so they’ll fucking leave. IE:The parasites. The Goldmans et al of this world, will ride this gravy train and suck the life-blood from the global economy until it's 100 metres from the buffers, so they avoid the ensuing damage. This gravy train has a way to go yet and the wreck will be post Obama presidency. All talk of impending global meltdown on his watch is merely wishful thinking and as I regularly quote Jim Rickards from his book Currency Wars, a book I read in 2011, what we are witnessing is currency debasement. “A race to the bottom” as he regularly puts it and he is 100% correct. So logic dictates it will be QE till the piper stops playing and we'll see whose carrying the bag when the music stops.
First Rule in investing: Never believe or trust any bankster from the chosen tribe.
All Goldman presentations are self serving.
"Over time, however, the risk preference of the private sector is likely to be higher than that of the central banks, and the privately held Dollars would find their way into riskier assets."
Look, there have been 2 important transactions occurring for the last eight years, side-by-side. (how they are connected is a deeper question.)
1) China sells goods, is paid in Dollars, parks said Dollars in UST (allowing massive US issuance) and PRINTS Renminbi to pay the workers. Sometimes they got the domestic printing function correct, sometimes not, Chinese economy runs hot and cold, mostly cold now that US and world demand for goods of said workers has fallen. The only Chinese who hold US assets are children of government functionaries or mobsters who pay Adelson in Macau to get their money out.
2) FED buys securities of all kinds from US banks, or foreign banks through their US subsidiaries, in order to "heal" the balance sheets of insolvent banks. The "healing" is at a rate of 35 bp per annum or something on Dollars parked at the FED. They can also make "good loans" to the private sector or trade currency for profit to "heal themselves." Meanwhile, the US Treasury ramps up its debt issuance allowing the US military to function. If you follow the circle around, it's almost as if the Treasury executes the draining operation after the FED prints.
So what happens now? China thought they could execute the reverse, sell Treasuries then sell the Dollars and buy RMB, but that pulls RMB out of the economy into CB hands. Repartriating overseas funds is a massive tightening of domestic currency and a massive add to Dollar liquidity in the global market. Meanwhile, China has to find a way to stabilize as it adds and subtracts with increasing frenzy. It cannot actually use the currency market to do what it wants to do. China can keep assets offshore, or it can give its workers the Dollars they have earned. But it cannot sell Dollars and buy RMB, because that extinguishes its own money supply. (Putin learned this the hard way....nearly collapsed his economy.)
But, the Dollars will make their way back into US assets. DB only calls this quantitative tightening because they are ignoring the currency market piece. This is a huge transfer of control over Dollar deposits to international private sector actors mostly in Asia.
Declining reserves means two things. 1) It means a loss of faith in reserve holdings (not hard to imagine when all that is backing those holdings is unpayable debt). 2)It means those nations are desparate to free up liquidity. This could be for a multitude of reasons. They could be running to hard assets as safe havens. They could be using those funds to recapitalize financial institutions.
What it says without a doubt is that the dolllar is losing reserve currency status. People will violently deny this in general because the dollar has enjoyed it's reserve status for so long. They will deny the facts that point to this esp. over the last few years with the emergence of the BRICS bank, Chinese currency exchanges, countries abandoning the petro dollar (SWIFT), and moving into gold. Because they cannot stand on the facts, they will resort to personal attacks and call anyone who questions that status of the dollar "stupid".
"All truth goes through three stages. First it is ridiculed. Then it is violently opposed. Finally, it is accepted as self evident." - Schoepenhouer
The truth will soon be revealed to all. Those who can see the truth before the masses realize it will stand to profit from it.
A black vampire squid. I like it.
But, but, is it raycist?
Lets ask one of the newest members of the clan, a European. Ghordius?
But they were only Squiding because they were enabled by the parent white man Super Squid (Lloyd Blankfein)